Deutsche Bank Boards Decide on New Strategy -- Update

By Eyk Henning 

Deutsche Bank AG said late Friday it will hive off its mass retail unit Postbank and slash assets at its investment bank as it seeks to boost its profitability and share price.

The executive and supervisory boards of the giant German lender agreed to "deconsolidate Postbank," the bank said in a brief statement Friday night. That means it will either float a majority stake in Postbank on the stock market and/or seek a buyer for the unit.

Co-chief executives Anshu Jain and Jürgen Fitschen are thereby unwinding an acquisition orchestrated by their predecessor Josef Ackermann, who decided to acquire Postbank for more than EUR6 billion in several steps starting 2008.

Deutsche Bank said it will also reduce assets in its investment bank while strengthening its transaction banking, asset and wealth management, and own retail activities. "Furthermore, [Deutsche Bank] will increase its investments in digital banking" and rationalize its geographic footprint," it said without specifying. The bank added it will release first quarter figures on Sunday and provide further details on the new strategy Monday.

The announcement doesn't come as a surprise as details of the new strategy have been reported in the past few weeks, including by The Wall Street Journal. The overhaul is deemed necessary as Deutsche Bank has lagged behind rivals in terms of profitability, share price and capital adequacy--a situation that has ignited the anger of several large investors. Several of them have privately said they would welcome a disposal of Postbank or the entire retail operations, a view that was supported by analysts.

The largest German lender struggled to boost revenues at Postbank and reap benefits from integrating it. New banking rules, ultralow interest rates and fierce competition in Germany's retail-banking market additionally wo rked against Deutsche Bank's plans with Postbank.

Disposing of Postbank over time takes away a stable source of income for the giant German lender, but it is set to improve its profitability and capital adequacy. The Western Germany-based unit contributed around EUR400 million, or 12%, to Deutsche Bank's pretax profit of EUR3.1 billion last year. Selling it will shave EUR156 billion or 10% off Deutsche Bank's EUR1.7 trillion in assets and likely improve Deutsche Bank's low leverage ratio, a measure for capital adequacy that compares loss absorbing capital to total assets. The bank recently recorded a ratio of 3.5%, less than many rivals.

Postbank has around 14,800 employees and around 1,100 branches. Including Postbank, Deutsche Bank has roughly 48,000 employees in its retail operations and around 100,000 employees in total. With around 700 branches, Deutsche Bank's own retail franchise and its advisory business for small and medium-size enterprises recorded a combined EUR652 million in pretax profit last year.

J.P. Morgan Cazenove analyst Kian Abouhossein said in a recent note that floating or selling Postbank or all of Deutsche Bank's retail operations would be positive for the share price, because the return on equity in those businesses has been low.

The investment bank isn't getting away unscathed. People familiar with the matter said earlier that the bank might cut between EUR150 billion and EUR200 billion of the investment bank's assets and pare back on prime brokerage with hedge funds, rates trading and repo business with other banks.

Mr. Jain has hinted several times that Deutsche Bank will remain a strong investment bank, saying that European companies will increasingly need this service. "Facts speak against emotions. Europe's [economy] needs a better balance between bank lending and capital markets. Deutsche Bank will be part of that," Mr. Jain said at a conference in March. Europe shouldn't have to solely rely on U.S. banks to provide large and small and medium-size companies with access to capital markets, he added.

Write to Eyk Henning at [e-mail]

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