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Sink hole

7 Oct 2015 By Dominic Elliott

Deutsche Bank’s shocking, pre-announced third-quarter loss may presage radical change. Germany’s biggest lender said on Wednesday that it would take a chunky 6.2 billion euro, or $7 billion, net loss in the three months to September on writedowns of past acquisitions. In particular, the revaluation of the 16-year-old Bankers Trust deal suggests new boss John Cryan may have another big surprise in store.

It’s often hard to find value in bank M&A. That explains why Deutsche Bank is booking charges on the so-called goodwill that has accounted for the difference between the purchase price and the book value of certain acquired assets. It’s a rite of passage for financial institutions overhauling themselves. Italy’s UniCredit, for instance, in March logged a 15 billion euro loss in its fourth quarter on similar reassessments.

Aside from the sheer scale of Deutsche Bank’s writedowns, there is another surprising feature. Investors had been bracing for some lower valuations of retail operation Postbank and a one-fifth stake in Chinese lender Hua Xia. Revisiting the 1999 acquisition of Bankers Trust, however, carries a certain symbolism. That was the deal, after all, that turbocharged Deutsche Bank’s transformation from a relatively staid German corporate lender into a bond and commodities trading behemoth.

It is possible then that Cryan, who will be co-CEO until next year when he becomes sole chief, is lining up bigger cuts in investment banking. His predecessor, Anshu Jain, outlined in April a plan to slash up to 150 billion euros of trading assets. Even if Cryan chooses to cut no more, the investment bank may shrink more than it might have under Jain. In a memo to employees, Cryan warned that the third-quarter loss may affect bonuses. When Barclays cut payouts for its own investment bankers in 2012, they left in droves. The Frankfurt-based lender also said it may scrap its full-year dividend to help pay for its overhaul.

The tough approach may nevertheless benefit Deutsche Bank’s shareholders in the longer run. A more coherently defined bank – perhaps along the lines of a corporate institution for Europe in the mold of JPMorgan, as hedge fund manager Davide Serra has suggested – with a more realistic valuation of its own assets would be a strong message to send when Cryan presents his strategic vision in a few weeks. Combined with substantial cost cuts, it would be more than just a run-of-the-mill kitchen sink job. It would be a thorough, value-adding renovation.


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