Friday , April 16 2021

The big banks in Germany are busy with the answers



After six thoughtless weeks of long-lasting and utterly futile joining talks, a heavy lift for Christian Schuang and Martin Silke has just begun.

The outcome of the talks between Deutsche Bank and Commerzbank means that the chief executives of both lenders must find conclusive answers to the annoying question that all investors, regulators, analysts and employees ask: What's next?

David Serra, head of Algebris, an asset manager, said the collapse of the talks created a "win-win" for both banks. "It's better to run their own plans, and both should cut costs, but it's easier and cheaper to do it organic," Serra said.

However, returning to business as usual does not seem to be a credible option. "The fact that they entered the talks suggest that the current strategies do not work towards the expected goals," said Anke Reingen, an analyst at RBC Capital Markets.

The two banks carry deep scars from the financial crisis and their shares trade steep discounts on the value of their assets. Investors worry that their plans to recover profits at the levels sought by investors are unrealistic because they face negative interest rates, weak economic growth and fierce competition in the country, state peers and internationally from Wall Street's revolutionary competitors.

Commerzbank, which allocated its growth targets in February, will now be rounded off by foreign suitors. Italian UniCredit and the Dutch lender ING registered their interest in the smaller banks in Frankfurt.

"I expect that Commerzbank will be bought from another European bank, which is a question of" when "instead of" if, "said Filippo Alloattie, an analyst at Hermes Investment Management.

For Deutsche Bank, the options are less direct. Several ways are available for the largest lender in Germany, in addition to making deeper cuts in its huge, but barely profitable investment bank. While Deutsche Bank plans to speed up the restructuring of its retail operations, this will not show significant results before 2021.

"The question about [them] now is how much they need to go to another restructuring? "said JPMorgan analyst Kian Abuhosein." They have no option but to address incomplete assets, "adding that US operations for securities trading and trading are obvious candidates because they estimate that the loss before taxation was between 200 and 300 million euros per year.

The lender on Thursday hurried some details about its earnings in the first quarter a day earlier, showing that profits are ahead of expectations. But its corporate and investment bank with problems has faced another 13 percent revenue drop over the year.

However, two senior executives at Deutsche Bank told the Financial Times that the lender was committed to improving its return on material capital to over 4 percent by the end of the year, versus only 0.4 percent last year.

However, none of the 17 major analysts covering the company believe this is possible, forecasting an average return of 1.5 percent this year.

"As our first quarter results show, we are heading in the right direction on our own," the employee's memorandum says, pointing out that net profits rose by more than 65 percent in a difficult market during the first three months of the year .

"This is just the beginning of the Deutsche Bank," said Danielle Brabbacher, an UBS analyst, adding that "the scenario for narrowing tangible investment funds is now the most likely scenario in the case of radical strategic change."

Regulators and policy makers in Berlin prompted Deutsche Bank to review the deal with their smaller rival in late 2018, after concerns were intensified that they were stuck in a downward spiral with low stock prices, increased funding costs and falling prices Come on.

However, debt markets have badly reacted to the news that the talks have ended. Deutsche Bank's credit risk agreements – derivatives that are paid if the company meets their debts – rose after the announcement.

One explanation for the merger was the hope that a large base of retail commercial retail banks could help reduce Deutsche's financing costs and strengthen the investment bank's competitiveness.

In parallel with the merger talks with Commerzbank, Deutsche had working groups to examine other options in the event of a non-contractual outcome, said one person informed about the issue.

Deutsche examines the potential merging of its operations with UBS funds in Switzerland to create a dominant group in the investment industry in Europe.

However, in itself, that agreement will barely apply to the bank's biggest problems, as asset management operations do not generate enough profits to move the lender's needle with € 1.4tn in assets.

Managers also seek to uncover unwanted assets in a "bad bank" in order to focus investors on the potential for a clean-up operation. Major shareholders, as well as Deutsche Bank regulators, are urging Mr Shuwang to reduce the corporate and investment bank that still contributes to half of the revenue.

A person informed of Deutsche's internal discussions confirmed that the revocation of around 20 billion euros from investment banking was considered – a small amount compared to the total assets weighted at the risk of 350 billion euros.

For now, some senior Deutsche Bank managers have reduced the need for deeper strategic resolution. "Today's decision enables us to focus all our energy on the strategy we started in April 2018 to make the KIB more profitable by cutting costs and being smarter as to where we allocate resources," said Garth Richie, head of corporate and Deutsche investment bank, wrote in a note to the staff.

However, a different CEO, who asked not to be named, said top managers knew how eager investors would have to learn about the next steps of the lender and they would respond "in due course".

The Executive Director said: "We talked about running our existing plans, and we talked about alternatives to speeding up those plans." Some analysts warn that Deutsche Bank may have to attract more capital for the fifth time in nine years if the markets turn sour or if it decides to radically reduce the investment bank.

However, the bank insists it is adequately capitalized with ordinary equity capital of 13.7 percent, above the regulatory minimum.

The German government will continue to play an important role in shaping the face of German banking. As a shareholder of 15 percent in Komercbank, he has the key to consolidating the bank.

Officials in Berlin said the government would be baffled by any offer from an Italian lender, such as UniCredit, for Commerzbank – one of the highest lending to small and medium-sized businesses in Germany.

Politicians fear that the potential budget crisis in Italy could spill over into the German corporate sector – driven by the large exposure of Italian sovereign bonds to a bank like UniCredit.

The Dutch or French buyer of Commerzbank – like ING or BNP Paribas – could be politically more acceptable to policymakers in Berlin, especially if a foreign lender moves important parts of its business in Frankfurt.


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