Fed Questions Deutsche Bank (DB) For 'Bad Bank' Proposal

Per a Financial Times article, Deutsche Bank (DE:DBKGn) (NYSE:DB) is being questioned by the U.S. regulators related to the impact on the German Bank’s U.S. operations after implementation of its “bad bank” proposal. The U.S. Federal Reserve officials demand details of the bank’s strategic plan which involves cutting down its investment banking operations.

Notably, following the failure of the annual stress test last year, the U.S. unit of the German bank is deprived off providing any payments to its parent company in Germany without Fed permission. For failure of the test, Fed said “widespread and critical deficiencies” in the bank’s capital planning.

Though Deutsche Bank’s U.S. arm has cleared the first round of stress tests 2019, the second round results to be reported later this week will decide the rescinding of restrictions on the bank.

The Expected Proposal

Under the proposals, Deutsche Bank is mulling to make cutbacks in the U.S. equities trading business, including prime brokerage and equity derivatives. The bank would create a ‘bad bank’, a measure used 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 chief executive officer (CEO) Christian Sewing 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.

The German bank’s planned divestiture of the assets is unlikely to hit its profit or capital due to the non-toxic nature. However, better-performing bond trading business and currency-trading operation will be retained by the bank.

The proposed changes are expected to be announced with the bank’s six-month results in the second half of July.

“As we said at the AGM on 23 May, Deutsche Bank is working on measures to accelerate its transformation so as to improve its sustainable profitability. We will update all stakeholders if and when required,” Deutsche Bank noted in an e-mailed statement.

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 #4 (Sell).

Shares of Deutsche Bank have lost around 9.2% on the NYSE, in the last six months, as against the industry’s growth of 9.7%.

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