In a fascinating interview last month, Investec co-founder Bernard Kantor unpacked how a surge in regulation had forever changed the banking business, making it a lot tougher for them to make money. Once you overlay expanded capital requirements, Kantor added, future profitability will at best reflect the kind of modest growth investors expect from public utilities. Only time will prove his thesis, but a reflection of how much the environment for banks has changed is glaringly obvious in the massive quarterly loss (virtually R100bn in SA terms) reported by global giant Deutsche Bank for the three months to end September. Analysts reckon that setback will break an uninterrupted 70 year record of dividend payments. After the Global Financial Crisis, banking will never be the same again. Believe it. – Alec Hogg
By Michael J. Moore, Nicholas Comfort and Hugh Son
(Bloomberg) — Deutsche Bank AG co-Chief Executive Officer John Cryan unveiled the firm’s biggest quarterly loss in at least a decade and may eliminate a dividend that’s stood since Germany’s postwar reconstruction as he tries to overhaul the firm without asking shareholders for more capital.
Europe’s biggest investment bank expects a third-quarter loss of 6.2 billion euros ($7 billion) after writing down the value of its two largest divisions and boosting reserves for legal costs. Its American depositary receipts tumbled 6.9 percent after the disclosure late Wednesday as of 6:36 p.m. in extended trading in New York. Cryan, in a memo to staff, said employees will share some of the burden when the firm sets year- end bonuses.
The charges clear the way for a strategy that Cryan, who became co-CEO in July, is preparing to present later this month as he looks to shore up capital and boost profitability. Spending on regulatory and compliance costs have overwhelmed the firm’s efforts to cut costs.
Cryan “wants to start off with a clean slate for himself and his shareholders,” said David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business. “They’re writing down areas that turned out to be riskier or less profitable than originally expected, essentially saying they’re worth less than before, which would certainly help comparisons in future years look better.”
Read also: Deutsche Bank shares soar after joint CEOs given the boot
The firm said it expects to book a 5.8 billion-euro writedown as higher capital requirements reduce the value of its investment bank and it adjusts the estimate of what it will receive in the disposal of its Postbank unit. The Frankfurt- based lender also is adding about 1.2 billion euros to its litigation reserves.
‘Fair’ Bonuses
The writedowns and dividend recommendation “have to be factored in some way into our upcoming decisions on variable compensation for the year,” Cryan, 54, wrote in the memo posted on the firm’s website. Final decisions on bonuses haven’t been made yet, he said. “You have my personal commitment to try to achieve a fair balance between staff and shareholder interests.”
The impairment charges will dwarf the 1.9 billion euros in writedowns that Anshu Jain, Cryan’s predecessor, took during the fourth quarter of 2012, his first year in the top job.
With Deutsche Bank to announcing a €6.2 billion loss, this may be a bad period for banks, with more PPI issues, emerging market exposure etc
— David Buik (@truemagic68) October 8, 2015
The firm said it may cut or eliminate the annual dividend, which was 75 cents for last year. The company has paid a dividend since at least 1957, when Deutsche Bank was re- established as a centrally managed financial institution. The payout hasn’t been lowered since 2008.
Capital Ratios
The impairments announced Wednesday won’t have a “significant impact” on Deutsche Bank’s capital ratios, the bank said. The charges also include about 600 million euros on the carrying value of a 20 percent stake in China’s Huaxia Bank Co. The German lender said it “no longer considers this stake to be strategic.”
“This is the prelude to a potential share sale in Huaxia Bank, probably in April next year,” said Ma Kunpeng, a Shanghai- based analyst at Sinolink Securities Co. Ma noted how Hang Seng Bank Ltd.’s change of accounting treatment of its stake in another Chinese bank had foreshadowed a disposal and cited the expiry on April 26 of a lockup covering part of Deutsche Bank’s holding.
Basel III requirements have made the stake too costly for Deutsche Bank to retain and selling will free up capital and boost Deutsche Bank’s return on equity, Ma said.
Read also: NY banking regulator probing Barclays, Deutsche Bank’s forex algorithm
Deutsche Bank bought into Beijing-based Huaxia Bank, one of the smallest listed national lenders, in 2005 and its stake is now worth about $3.5 billion. Huaxia Bank’s shares rose 1.8 percent as of 9:33 a.m. in Shanghai, lagging behind a 2.9 percent gain in the Shanghai Composite Index.
Reuters reported in April that the German bank had received offers for the asset. Global firms including Goldman Sachs Group Inc. have sold stakes in Chinese banks in recent years as new rules require more capital be held against the investments.
‘Sour Pill’
Cryan, who will share the CEO post with Juergen Fitschen until May, inherited a strategy to boost returns by lowering expenses about 15 percent by 2020 and shrinking assets at the investment bank as much as 17 percent through 2018. The bank will release the details of its plan and final figures for the third quarter on Oct. 29.
Bad news for employees of Deutsche Bank – CEO John Cryan says workers will have to bear the brunt of the impact of the bank’s charges.
— Squawk Box Europe (@SquawkBoxEurope) October 8, 2015
“The sour pill always comes first,” Sebastien Pigeon, an analyst covering European financial firms at Morningstar Inc., said of Wednesday’s announcement. “You drop the bad news first, before the upcoming investor meeting to review his strategy.”
Cryan is seeking to avoid tapping shareholders for funds while focusing on reorganizing the bank to meet growing demands for buffers from regulators. In July he said “raising additional capital would not solve our core problem of reversing our low financial returns and our poor organic capital generation.”
Deutsche Bank had turned to Postbank to diversify its funding mix by boosting consumer deposits in the midst of the global financial crisis. With its disposal, Deutsche Bank will cut its workforce by about 15,000, and the lender is considering cutting 8,000 additional jobs, a person with knowledge of the matter said last month.
