Deutsche bank weighs up to US$56 billion bad-bank unit, FT reports

Deutsche Bank AG is planning to set up a bad-bank unit as part of an overhaul of the bank’s business operations. (AFP pic)

SINGAPORE: Deutsche Bank AG is considering setting up a bad-bank unit that could eventually hold as much as 50 billion euros (US$56 billion) of risk-weighted assets, the Financial Times reported, citing people familiar with the matter.

The plan is part of an overhaul of Deutsche Bank’s trading operations as Chief Executive Officer Christian Sewing shifts Germany’s biggest lender away from investment banking.

As part of the revamp, which isn’t finalised, Deutsche Bank’s equity and rates-trading businesses outside of Europe would be shrunk or closed entirely, according to the FT report. Managers are also set to unveil a new focus on transaction banking and private wealth management, the newspaper said. The proposed bad bank, known internally as the non-core asset unit, will be comprised mainly of long-dated derivatives.

In rejigging operations, Sewing is trying to reverse a share-price slide that left Deutsche Bank with the lowest price-to-book-value ratio of the 37 lenders in the Bloomberg Europe 500 Banks and Financial Services Index. The firm’s credit rating was lowered earlier this month by Fitch Ratings Ltd., which could increase funding costs.

The CEO is also tasked with restoring market confidence in Deutsche Bank following the breakdown of takeover talks with Commerzbank AG. Sewing had explored a merger with Commerzbank to end what Deutsche Bank has called a “vicious circle” of declining revenue, sticky expenses, a lowered credit rating and rising funding costs. But the talks collapsed in April, leaving investors guessing what’s next.

An announcement about the bad bank may come with Deutsche Bank’s half-year results in late July, the FT said.

Deutsche Bank said in a statement to the FT that it is “working on measures to accelerate its transformation so as to improve its sustainable profitability. We will update all stakeholders if and when required.”