Deutsche Bank Faces Pressure to Expand Consumer Unit

30.07.2008

Deutsche Bank AG Chief Executive Officer Josef Ackermann is facing pressure from shareholders to buy a German consumer lender such as Deutsche Postbank AG as losses at the securities unit mount.

The investment bank, led by Anshu Jain and Michael Cohrs, may post a second straight loss when the Frankfurt-based company publishes results tomorrow, analysts estimate. Deutsche Bank's second-quarter net income probably fell to 491 million euros ($766 million) from 1.78 billion euros a year ago, according to a Bloomberg survey of 19 analysts.

Ackermann pledged almost two years ago to rein in the reliance on the securities firm, which accounted for about 65 percent of pretax earnings in 2006, by expanding in consumer lending and money management. Since then, the collapse of the U.S. subprime mortgage market led to $474 billion of credit losses and writedowns at financial institutions globally, including $7.7 billion at Deutsche Bank, data compiled by Bloomberg show.

``Deutsche Bank is still too dependent on investment banking,'' said Dirk Bartsch, who helps oversee about $620 million in financial stocks, including Deutsche Bank shares, at Cominvest Asset Management in Frankfurt. ``It needs to expand the retail business, but it can't afford to overpay.''

Second-quarter losses at the securities unit probably amounted to 154 million euros, analysts' estimates show. Writedowns on mortgage-related debt, securities backed by bond insurers, and loans for leveraged buyouts may total 1.76 billion euros, according to the median estimate of four analysts.

Deutsche Bank spokesman Armin Niedermeier declined to comment on the company's earnings or takeover plans.

Postbank Talks

Deutsche Bank has dropped 36 percent in Frankfurt trading this year, compared with the 32 percent decline in the 71-company Bloomberg Europe Banks and Financial Services Index. Deutsche Bank fell 20 cents, or 0.4 percent, to 57.57 euros by 10:17 a.m. today.

Ackermann, 60, said in May that Germany's largest bank wouldn't ``stand on the sidelines'' as Postbank and Allianz SE's Dresdner Bank came up for sale. Deutsche Bank lost out to Credit Mutuel Group this month in bidding for the German retail lending unit of Citigroup Inc., which the Paris-based customer-owned bank agreed to buy for 4.9 billion euros in cash.

Deutsche Post AG, Europe's biggest postal service, said last month it was holding ``exploratory'' talks about a sale of its majority stake in Postbank. Ackermann said on May 29 he'd be interested in buying Postbank for a reasonable price.

`Right Direction'

A takeover of Bonn-based Postbank, Germany's biggest consumer bank by clients, would add about 14.5 million customers to the 9.7 million Deutsche Bank currently has, and almost double the branch network to more than 1,800 in Germany. The purchase would also add about 1 billion euros in pretax profit.

``Postbank would be a step in the right direction,'' said Peter Braendle, who helps manage about $56 billion in equities, including Deutsche Bank shares, at Swisscanto Asset Management AG in Zurich. ``It would significantly reduce dependence on investment banking. Strategically it would make sense, but not at any price.''

A takeover of Postbank for 9 billion euros to 11 billion euros would dilute Deutsche Bank's earnings per share by as much as 22 percent, Carsten Werle, an analyst at Sal. Oppenheim in Frankfurt, wrote to investors this month. The company has a market value of about 7.6 billion euros after the stock dropped 23 percent this year.

Postbank rose today in Frankfurt trading after reporting an increase in lending income that beat analysts' estimates. Net income fell 21 percent on debt writedowns.

Deutsche Bank might face difficulties raising financing for a purchase by selling shares, Werle said.

No Capital Needed

Banks worldwide have been forced to seek almost $353 billion from investors to replenish capital after subprime-related losses. Merrill Lynch & Co., the third-biggest U.S. securities firm, said two days ago it will sell $8.55 billion of stock and liquidate $30.6 billion of bonds at a fifth of their face value to shore up credit ratings imperiled by mortgage losses.

Deutsche Bank said on July 2 that its Tier 1 ratio, a measure of capital strength, will remain about 9 percent and it doesn't expect second-quarter results to require further capital. The bank's target range for Tier 1 is 8 percent to 9 percent.

Deutsche Bank is counting on retail and private-bank deposits to enable it to stave off the fundraising that other banks have needed following losses, the Wall Street Journal said yesterday, citing a person familiar with the situation that it didn't identify.

The bank said earlier this month it will report a profit in the second quarter, after posting its first quarterly loss in five years in the first three months of the year on 2.7 billion euros of writedowns.

Deutsche Bank agreed in early July to buy commercial-lending units in the Netherlands for 709 million euros from Fortis to ``continue growing its stable businesses,'' it said. It also bought German retail lenders Norisbank and Berliner Bank for 1.1 billion euros in 2006.

Source: bloomberg.com