As part of the "tough measures" following the $7.2 billion settlement with the DOJ, the German lender is planning a partial IPO of its asset management arm with an approximate value of over €8 billion.
Germany's Handelsblatt reported yesterday, citing anonymous Deutsche Bank (NYSE: Deutsche Bank [DB]) sources, that the bank was planning to partially sell its asset management business in order to free up additional capital. According to the sources, a partial flotation of the bank's asset management arm was a "done deal", with another source working at Deutsche Asset Management confirming that an initial public offering is currently being prepared. However, no definitive decision has been made so far.
Reuters added that the registration of the unit in question would also be transferred to Luxembourg due to "clear tax and regulation advantages", although Deutsche Bank has not provided any comments on the reports. Deutsche CEO John Cryan described the asset management business as a "very lovely steady stream of predictable profits and revenues" for the company, since it accounted for as much as one third of all bank's pre-tax profits in the first 9 months of the last year, according to Reuters' data.
In Q3, the asset management arm managed to generate positive pre-tax income, with post-tax returns of more than 30% in the situation when the bank's overall revenues dropped 8%, said The Street. If Deutsche Bank's management approves the IPO, it could generate as much as €8 billion for the company. However, the analysts previously believed that the bank was only considering a sale of a 25% stake of the unit, since some of the bank's investors had claimed that it was important to still have access to this reliable earnings stream.
"People forget how big it is and it’s a very lovely steady stream of predictable profits and revenues for us so we like it very much so we’ll keep that," Cryan said during last week's World Economic Forum in Davos, as reported by Reuters and Finance Magnates.
The Street reported that Deutsche Bank's shares jumped 2.25% to €18.86 in Frankfurt earlier today, the highest level in the last 52 weeks and a 90% jump since September.
Tightening belts
Handelsblatt's report comes a few days after the lender officially finalized negotiations with the U.S. Department of Justice, with Deutsche CEO Cryan saying that the bank's mis-selling of toxic mortgage-backed securities between 2005 and 2007 in the U.S. was "unacceptable" and fell short of the corporate standards. The American regulator agreed to settle the case for a penalty of $7.2 billion that included $3.1 billion of civil monetary penalty to be paid out immediately as well as $4.1 billion of consumer relief payments.
Deutsche Bank warned its shareholders last week that the penalty would negatively affect the bank's financial performance in Q4. According to Reuters, the bank is expected to suffer losses of as much as $1.2 billion in the fourth quarter. The fourth-quarter as well as full-year results will be announced already next week.
On top of that announcement, Cryan said the bank's management board decided to significantly cut bonuses for employees worldwide, him included. The bonus cuts could affect over 20% of all bank's 100,000 employees, said the analysts. In the statement, the management board said it was "the right thing to do", considering the bank's legal struggles.
"Now that we have a clearer idea of the financial impact of the settlement with the US Department of Justice and our performance for the year, we feel that tough measures are unavoidable. This is especially true at a time when thousands of jobs are being cut and our shareholders are not receiving an annual dividend," the company said in a statement.
Even though the sources claimed that no definitive decision on the sale of the bank's asset management arm was made, the speculations about a possible sale of one of the most valuable businesses could become yet another uncomfortable announcement to make for Deutsche Bank.