Deutsche Bank Weighs Forming a Holding Company 

(Bloomberg) -- Deutsche Bank AG is weighing a move to split its core businesses under a holding company, a measure that would make it easier to break up in a crisis and more agile in potential mergers, according to people with knowledge of the discussions.

The bank has been encouraged by regulators to adopt the structure, which could create three largely independent core divisions overseen by common management, the people said, asking not to be identified as the deliberations are private.

Deutsche Bank’s investment bank is still struggling to compete with peers, while its retail division is unable to make a substantial profit in an overbanked market because of its bloated workforce. Chief Executive Officer Christian Sewing announced the bank’s fourth restructuring in three years in April, mostly focused on cuts to the investment bank, though he has yet to convince investors of its merits; the stock is down almost 40 percent this year.

“Non-operating banking holding companies provide for strategic flexibility,” and can help banks satisfy regulators on their ability to be wound down if needed, said Jan-Alexander Huber, a partner and banking expert at Bain & Co.

A spokesman for Deutsche Bank declined to comment.

Non-Priority

While top management doesn’t currently see the change as a top priority, many executives believe it could increase the bank’s strategic flexibility, several people said. Several representatives of large Deutsche Bank investors said they were not opposed to a more flexible structure, which could see the different units sharing some support functions. Deutsche Bank has previously discussed turning itself into a holding company but decided against it, the people said.

Meanwhile, speculation about a potential merger with Commerzbank AG, Germany’s second-biggest listed lender, has resurfaced in recent weeks. The tie-up is seen as a preferred long-term option within the bank, Bloomberg reported in June.

Considerations on potential deals are purely theoretical at present, and no decision on any potential merger is imminent, the people said. A tie-up with any bank, domestic or foreign, is unlikely to be announced this year, they said.

Regulatory Hurdles

Deutsche Bank is already taking steps toward a greater separation of its divisions. It sold shares in an initial public offering of its asset management arm in March, and it’s also restructuring its German retail unit after merging two previously independent units. That will include moving back-office staff into the division to make it more independent from the parent, two people said.

“The pressure to consolidate will rise significantly” in Europe, Sewing said in a speech earlier this month. Frankfurt, where Deutsche Bank is headquartered, should play an active role if the European banking industry were to be reshaped, German Finance Minister Olaf Scholz suggested at the same conference.

The change to a holding structure would face many regulatory difficulties, including finding ways to ensure the investment bank can still receive funding through the group and maintain its credit rating, two people said. Another person said that the re-valuation of assets on the balance sheet, which might result in a tax burden, would be the biggest hurdle.

Such structures “might expose banks to significant adverse implications and inefficiencies in their operating and funding models,” Bain’s Huber said.

Other challenges to the potential structural revamp would be organizational, burdening management and staff with yet another restructuring while the other revamps are unfinished.

The lender would need to find ways to account for shared services such as legal, marketing or compliance. It would also run the risk of creating duplicate roles -- at a time when it’s locked into an ambitious cost-cutting program -- by re-assigning currently shared services to the individual divisions, one person said.

A holding company could result in better credit ratings for the operating companies as debt issued by them is less likely to be used to repay more senior debt in a wind-down -- called a bail-in -- according to a presentation on Deutsche Bank’s website. Most big U.S. and Swiss banks have such a holding structure, according to that presentation.

Deutsche Bank’s shares opened 0.4 percent higher at 9.57 euros in Frankfurt Thursday, having risen slightly late Wednesday when the news was first published. They are still down nearly 40 percent this year.

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