Picture: BLOOMBERG
Picture: BLOOMBERG

New York — Deutsche Bank has set aside more than €1bn to cover the cost of offloading derivatives in its “bad bank”, or capital release unit, three sources at the bank have said.

The cost, which has not been publicly disclosed, is included within the €7.4bn budget the German lender has set aside for its restructuring, which will also see 18,000 jobs axed as the bank exits unprofitable businesses.

Key to the restructuring is the creation of a bad bank to house €288bn of unwanted assets earmarked for sale or wind-down, including equity derivatives and long-dated interest rate and credit derivatives.

Deutsche Bank is still assessing and gauging interest in the assets before repackaging some for sale, the sources said. Deutsche Bank declined to comment.

The bank will run a formal auction of its equity derivatives book, which Reuters reported last week had garnered “significant expressions of interest” from US and European banks, over the next two months, the sources said.

After that, it will attempt to sell portfolios of long-dated interest rate and credit derivatives. Those assets have low returns and require high levels of capital to be held against them, making them less attractive to buyers. As a result, Deutsche Bank may have to offer deep discounts to offload them, the sources said.

Deutsche Bank executives believe they have made a conservative assumption of the cost of offloading the derivatives and are confident that writedowns will not exceed their expectations. However, if the cost of exiting the positions were to be higher than anticipated, the bank would likely have to hold some of the derivatives positions beyond the 2022 deadline it has set for offloading them, the sources said.

The alternative would be to take deep writedowns and raise funds from shareholders to cover the extra losses, something it has ruled out doing. It is not certain investors would even back such a move, having already stumped up €29.3bn in four capital raises since 2010.

The bank has targeted reducing assets held in the unit to €119bn this year and €9bn by 2022.

‘Looking at five years’

“If they have some really smart structures in mind and are prepared to take deep discounts, that may be achievable, but if they want to do it in an orderly fashion and limit the downside, I’d say they’re looking at five years,” said Robert Cranmer, a partner at financial services consultancy Sionic.

Deutsche Bank’s CEO Christian Sewing is looking to restore confidence among investors who have seen the bank’s stock lose more than three-quarters of its value over the past four years. The derivatives positions, some of which don’t expire for as long as 30 years, are tying up capital that could generate hundreds of millions of euros in income each year, Reuters reported last week.

Deutsche Bank announced the creation of its capital release unit in July. It is the bank’s second attempt at hiving off unwanted assets since the 2007-2009 financial crisis.

The unit houses fixed-income assets, including long-dated interest-rate derivatives, worth €79bn, Deutsche Bank has said. It also contains €25bn of assets, mostly credit and interest-rate derivatives, which Deutsche Bank initially hived off for sale or writedown in 2017.

Some analysts say Deutsche Bank will still be left holding problem assets even if it successfully offloads those placed in the capital restructuring unit.

Only 30% of Deutsche Bank’s €24bn of level 3 assets, which are the most illiquid and hard to value, have been placed within the unit, according to a presentation the bank made alongside its second-quarter results last month. Deutsche Bank declined to comment on why it chose not to place more level 3 assets in its bad bank.

Reuters