Deutsche Bank and the Postbank Problem
Deutsche Bank DBK.XE +1.11% is trying to lose weight, but not everyone can agree how many pounds the German bank will really shed.
On Monday Deutsche Bank set out its new strategy. The plan essentially centers on a new leverage ratio of 5%, up from 3.4% today. This ratio is essentially a bank’s capital divided by its exposure, and such an increase will put it far ahead of current European standards.
To do so, the lender will continue an earlier cost cutting program, trim its investment bank, and sell off retail arm Postbank by the end of 2016. It’s the last of those that’s causing analysts some problems, though, with questions on whether the benefit will be as big as Deutsche Bank claims it will be.
Deutsche says the sale of Postbank, via an initial public offering, will effect a 0.4 percentage point improvement in the leverage ratio. However, Andrew Lim, an analyst at Societe General, pressed Deutsche Bank’s management on that figure in a call for analysts Monday. He said: “I just can’t make the math square at all. It just doesn’t make any sense.”
In response, Stefan Krause, Chief Financial Officer at Deutsche Bank, said: “I don’t know how you get your numbers,” adding that the pair should take the conversation “offline.”
So is Postbank worth what Deutsche Bank thinks it is?
At present, Deutsche Bank has €52.5 billion worth of capital, and €1.549 trillion in exposure, according to the company’s latest figures to the end of March this year. This gives a leverage ratio of 3.39%.
Getting rid of Postbank essentially amounts to an asset swap. While Postbank adds leverage to Deutsche Bank’s balance sheet, it also provides capital. The spinoff means cutting exposure, while swapping Postbank’s capital for hard cash.
According to the bank’s strategy presentation, ditching Postbank will reduce exposure by around €140 billion, which gives a new group-wide exposure of €1.409 trillion. Postbank has a weak leverage ratio of 3.1%, so contributes around €4.3 billion to Deutsche’s balance sheet.
If Deutsche can sell Postbank for around €4.3 billion, it will have a new leverage ratio of 3.72%, an improvement of 0.33 basis points. So Deutsche Bank’s math isn’t that far off. Perhaps even a generous rounding error.
Unfortunately, analysts do not think the Postbank business is that good. Let’s delve further into the numbers.
Postbank achieved a return on equity of 4.4% after tax in 2014, according to company filings. Compare this to Deutsche Bank’s Private & Business Clients arm, which posted a return on equity of 6.1% last year, after tax. And that is hardly stellar.
Postbank’s return on equity will affect the price investors are willing to pay. In a research note following the call, Mr. Lim estimated a price of €3.6 billion for Postbank.
Putting a Price on Postbank
Deutsche Bank is planning to spinoff retail arm Postbank, which it hopes will bump up the German bank’s leverage ratio by 0.4 percentage points.
In other words, Deutsche Bank would be cutting its liabilities, but also losing capital. According to analysts at Barclays, the Postbank sale would need to bring in €1 billion more than its current assets to hit that 0.4% figure.
And any IPO will also face considerable execution risk, especially in the current topsy-turvy world of European equity markets.
Deutsche Bank is not yet revealing how much it expects to gain from the sale of Postbank. To be fair, it may get €4.3 billion or more from investors keen to buy into a stable retail business in a low yield environment, or from an acquisitive retail giant eager to expand into Germany.
Or it may not.
“Capital accretion assumptions on Postbank exit look optimistic” summed up a note from Barclays published Tuesday.
- All figures taken from Deutsche Bank’s corporate filings, and its latest strategy update
http://blogs.wsj.com/moneybeat/2015/04/30/...nd-the-postbank-problem/
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