Deutsche Bank (DB) Incurrs Losses On U.S.-Leveraged Loans

Troubles have been mounting for the German lender, Deutsche Bank (DE:DBKGn) (NYSE:DB) — the latest blow being the sale of two risky corporate loans underwritten by the bank — per a Financial Times article. The bank has incurred multimillion-dollar losses in its U.S. investment banking arm after offloading the two loans underwritten for private equity clients.

Per the source, the first loan worth $340 million, backing the leveraged buyout of Smart & Final grocery chain by Apollo Global Management, was priced at a discount of 90 cents on the dollar by a group of banks led by Deutsche Bank, on the one hand. Moreover, such deal eroded the fees to be earned by the bank on the transaction. Though the amount of loss was not known, it was incurred as investors refrained from buying the debt under the prior terms offered.

On the other hand, the second loan worth €1.5 billion, which funded the buyout by Advent International, a private equity group of a plastics business owned by Evonik was also priced at a discount of 95 cents on the dollar as investors were not supportive.

However, Deutsche Bank refrained from commenting on the deals.

The current losses are feared to hit the bank’s chief executive officer (CEO) Christian Sewing’s restructuring initiatives for boosting the company’s returns. Notably, Deutsche Bank is mulling to make cutbacks in the U.S. equities trading business, including prime brokerage and equity derivatives. The bank has also planned to create a ‘bad bank’, a measure taken up by failed U.K. banks post the 2008 financial crisis.

The newly-formed unit would hold tens of billions of Euros of assets worth around €50 billion as the bank’s CEO is trimming its investment banking division. This includes Sewing’s plans to shrink or shut down the equity and rates trading businesses outside continental Europe completely, and focus on the core transaction banking and private wealth management business.

Notably, the losses incurred on loans are expected to drain returns from debt originations of the bank. In the first quarter of 2019, debt arranging fees declined 8%, leading to a 13% drop in total net revenues of the investment banking unit.

Our Viewpoint

Deutsche Bank is under pressure to trim its investment banking division, following the collapse of merger talks with domestic rival Commerzbank (DE:CBKG). Though Deutsche Bank’s restructuring efforts, including cost-saving measures, look encouraging, it is difficult to determine how much the bank will gain, considering the prevalent headwinds. Furthermore, dismal revenue performance is another concern.

Deutsche Bank currently carries a Zacks Rank #3 (Hold).

Shares of Deutsche Bank have lost around 8.8% on the NYSE, in the last six months, as against the industry’s growth of 7.8%.

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