Deutsche Bank and the 50 Billion Euro Bad Bank

€50 Billion ‘Bad Bank’

 

Christian Sewing, the chief executive of Deutsche Bank, is planning on shifting Germany’s largest lender far away from investment banking. Deutsche Bank has plans to create a bad bank that will hold several billions of euros to combat their debt.

 

A bad bank is a bank that is set up to buy the bad loans from a bank that has several nonperforming assets. With these assets in the bad bank, the original bank is able to clear its balance sheets.

 

After adjusting for risk, the bad bank created by Deutsche Bank is set to house or sell assets of around €50 billion.

 

Deutsche Bank’s equity and rates trading businesses outside of Europe will shrink significantly or even close completely.

 

This proposed bad bank will consist primarily of long-dated derivatives. Sewing will most likely announce the changes in detail in late July.

 

Though the final scale of the bank has yet to be decided, several executives are considering €30 billion in risk-weighted assets, eventually reaching around €50 billion. It is estimated to account for around 14% of Deutsche Bank’s balance sheet.

 

Deutsche Bank has recorded loses in the last two quarters. The bank’s share price is the lowest it has ever been in its entire 149-year history. Scandals, misconduct, among other things, have caused its share price to collapse.

 

This year, Deutsche Bank is aiming for a return on tangible equity of at least 4%, which is not only below most of it’s competitors, but far too unrealistic. The bank only generated a 1.3% return in the first quarter. No analyst sees the bank reaching that goal of 4% unless it undergoes massive structural changes.

 

One of the things that the bank plans on keeping is its bond trading business, which is performing quite well. In fact, it is ranked in the global top-five by Coalition, an industry monitor.

 

The bank is also planning on retaining its currency trading operation, which quite spectacularly held the second spot on the Euromoney FX survey just last year.

 

Tons of Pressure and Large Losses

Shareholders of the bank’s stock have been putting pressure on Deutsche ever since it has dipped below €6 this month, which is 40% lower than what it was last year at this point in time.

 

JP Morgan estimated that the bank loses around €600 million annually in just its global equities business.

 

The bank has been losing money for years, and it only recently decided to make changes because it feared that it would lose large parts of the equities and rates businesses.

 

Deutsche Bank had a bad bank between 2012 and 2016 with around €125 billion in risk-weighted assets. With around €10 billion left in assets when the bad bank was dissolved, Deutsche Bank reinvested that money into the primary business.

 

Investment banking in Europe has remained weak, however, and the European Central Bank has shown that interest rates will remain negative for a while, forcing Deutsche Bank to take this course of action.