Deutsche Bank AG co-Chief Executive Officer John Cryan may eliminate a dividend that’s stood since Germany’s postwar reconstruction as he tries to overhaul the firm without asking shareholders for more capital.
Europe’s biggest investment bank said it’s writing down the value of its two largest divisions and boosting reserves for legal costs which will probably lead to a third-quarter loss of 6.2 billion euros ($7 billion) -- the largest quarterly loss in at least a decade. The shares rose as much as 3.1 percent and were 1 percent higher as of 10:33 a.m. in Frankfurt trading, erasing earlier losses of as much as 3.6 percent.
The charges clear the way for a strategy that Cryan, who became co-CEO in July, is preparing to present later this month as he looks to shore up capital and boost profitability. Spending on regulatory and compliance costs have overwhelmed the firm’s efforts to cut costs.
“The dividend had been seen as holy for the last few years, but this is a positive,”
Christian Hamann, an analyst at Hamburger Sparkasse who has a neutral recommendation on the stock, said by phone on Thursday. “The write-downs show that the business just isn’t as profitable any more. It is really welcome that they’re dealing with legacy issues as that’s a sign of strength.”
The firm said it expects to book a 5.8 billion-euro write-down as higher capital requirements reduce the value of its investment bank and it adjusts the estimate of what it will receive in the disposal of Deutsche Post-bank AG. The Frankfurt-based lender also is adding about 1.2 billion euros to its litigation reserves.
‘Fair’ Bonuses
The write-downs and dividend recommendation “have to be factored in some way into our upcoming decisions on variable compensation for the year,” Cryan, 54, wrote in the memo posted on the firm’s website. Final decisions on bonuses haven’t been made yet, he said. “You have my personal commitment to try to achieve a fair balance between staff and shareholder interests.”
Deutsche Bank said it may cut or eliminate the annual dividend, which was 75 cents for last year. The company has paid a dividend since at least 1957, when Deutsche Bank was re-established as a centrally managed financial institution. The payout hasn’t been lowered since 2008.
Capital Ratios
The impairments announced Wednesday won’t have a “significant impact” on Deutsche Bank’s capital ratios, the bank said. The charges also include about 600 million euros on the carrying value of a 20 percent stake in China’s Huaxia Bank Co. The German lender said it “no longer considers this stake to be strategic,” signaling it intends to sell the holding.
Deutsche Bank bought into Beijing-based Huaxia Bank, one of the smallest listed national lenders, in 2005 and its stake is now worth about $3.5 billion. Global firms including Goldman Sachs have sold stakes in Chinese banks in recent years as new rules require more capital be held against the investments.
Demanding Task
Cryan, who will share the CEO post with Juergen Fitschen until May, inherited a strategy to boost returns by lowering expenses about 15 percent by 2020 and shrinking assets at the investment bank as much as 17 percent through 2018. The bank will release the details of its plan and final figures for the third quarter on Oct. 29.
“The task facing new management is very demanding,” Goldman Sachs Group Inc. analysts wrote in a note to clients on Thursday. “Litigation issues do not end with this mark down – we expect them to persist for a multi-year period. We do not see this as a ‘clean up’ but rather an indication of what the ‘fixing’ of Deutsche Bank will entail over the 2015-18 period,” they wrote.
Cryan is seeking to avoid tapping shareholders for funds while focusing on reorganizing the bank to meet growing demands for buffers from regulators. In July he said “raising additional capital would not solve our core problem of reversing our low financial returns and our poor organic capital generation.”
Deutsche Bank had turned to Post-bank to diversify its funding mix by boosting consumer deposits in the midst of the global financial crisis. With its disposal, Deutsche Bank will cut its workforce by about 15,000, and the lender is considering eliminating 8,000 additional jobs, a person with knowledge of the matter said last month.
source:Bloomberg
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