Deutsche Bank Set Up a Bad Asset Unit Before and Paid Dearly

(Bloomberg) -- Its deja vu again for Deutsche Bank AG. Not only is the troubled lender looking to cut back in U.S. equities, a plan it mooted a year ago, but it’s also considering creating a unit for unwanted assets. The company has been here before and it wasn’t cheap.

The German lender set up what’s often called a “bad bank” in 2012 to house holdings that had become less profitable due to stricter regulation, winding it down at the end of 2016. On the positive side, the unit helped Deutsche bank dispose of the assets more quickly than it could have if they had stayed in their separate business units. It also ultimately freed up as much capital as a share sale would have brought in. But it took a lot of time and money.

Here are four charts that show how the last non-core unit weighed on the company.

Time: Co-CEOs Anshu Jain and Juergen Fitschen created the non-core unit to focus on businesses they thought showed the most promise. But three years later, senior executives were still busy dealing with the bank’s legacy. It fell to their successor, John Cryan, to accelerate the wind-down, even if it meant additional losses.

Losses: Deutsche Bank faced more than 13.7 billion euros ($15.3 billion) of pretax losses at the non-core unit after selling assets for less than they were valued pulling out early from trading contracts. Still, shedding the unit’s weight added about 2% points to the bank’s key measure of financial strength over time. That about the same effect as the 8 billion euros of capital that Deutsche Bank raised from investors in 2017.

Litigation: A key driver behind the non-core unit’s losses was its legal costs. Some of the businesses parked there dragged Deutsche Bank into global misconduct scandals. In the fourth quarter of 2016 alone, the unit faced 1.35 billion euros of litigation expenses as the lender set aside more money to pay a $3.1 billion penalty to the U.S. Justice Department. The case focused on the bank’s role in the sale of mortgage-backed securities blamed for fueling the 2008 financial crisis.

What? The non-core unit absorbed unwanted parts of companies Deutsche Bank had acquired during a retail banking and wealth management expansion. The division substantially lowered risk from consumer lender Deutsche Postbank AG and handled the sale of Germany’s BHF-Bank as well as businesses ranging from casinos to a New Jersey port. Still, the trading arm accounted for the largest share of hived off assets. That included asset-backed securities, commercial real estate loans, derivatives and exposure to bond insurers.

--With assistance from Steven Arons.

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

©2019 Bloomberg L.P.