Deutsche Bank's Unloved Assets to Cast Long Shadow in Overhaul

(Bloomberg) -- A key pillar of Christian Sewing’s sweeping overhaul of Deutsche Bank AG is a plan to sell or wind down billions of euros in low-profit assets to help pay for the 7.4 billion-euro ($8.3 billion) revamp. While some of that will be offloaded quickly -- via a special wind-down unit -- and may fetch a decent price, other holdings will remain with the bank for years, tying up capital that could be spent on the restructuring.

The chief executive officer has given himself through 2022 to finish the job, about a year longer than it took two of the bank’s largest European competitors to close their non-core units. Here are three charts to describe the challenge ahead.

The selloff should start with a bang because most of the assets from the now-shuttered equities business mature soon. Finance chief James von Moltke said Deutsche Bank can dispose of the holdings faster and at a lower cost than its competitors achieved with what are commonly called bad banks. As seasoned Deutsche Bank investors will remember, the company’s previous non-core unit quickly offloaded the “low-hanging fruit” but continued to face billions of euros of losses through the fourth year of its existence.

While the bank expects to get physical assets off its balance sheet quickly, regulations require it to hold capital to cover their risks for years after they are disposed of. That could be inconvenient because Deutsche Bank expects to erode its existing financial reserves to pay for the overhaul, a move that leaves little room for error, according to RBC Capital Markets analyst Anke Reingen. The bank is working with regulators to reduce the burden from the lingering risk requirements and reflect “our smaller footprint,” von Moltke said.

Getting rid of unwanted assets can eat into managers’ time and take longer than anticipated. Deutsche Bank previously set up a non-core unit in 2012. Three years later, its work wasn’t finished and it was left to the regime of John Cryan, who became co-CEO in 2015, to take losses to accelerate the wind-down. The bank is being more conservative in its assumptions this time and it “will take opportunities to accelerate the wind-down where it’s economically rational,” von Moltke said.

To contact the reporter on this story: Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Ross Larsen, Andrew Blackman

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