Deutsche to pare investment bank, hive off Postbank in revamp

By Thomas Atkins

FRANKFURT (Reuters) - Deutsche Bank (DBKGn.DE) will cut back investment banking, sell its Postbank (DPBGn.DE) retail chain via a public share offering and reduce costs, the group said late on Friday, in a restructuring plan designed to boost profits.

Germany's largest bank is under pressure to revive its performance as new regulations, legal headaches and weak markets eat into returns but investors will have to wait until Monday for details of the strategy, which was unanimously endorsed by the group's supervisory board after hours of deliberation.

In a statement, Deutsche said it wished "to remain a leading global bank based in Germany" but the new strategy is a step back from a previous commitment to maintain a universal platform globally offering everything from derivatives to mortgages

Splitting Postbank but keeping the group’s own-branded retail chain means Deutsche management chose the less radical of two restructuring models. Under a more dramatic plan previously considered, Deutsche weighed leaving retail finance entirely and becoming a pure investment and commercial bank.

The bank will pull back from some countries but invest in operating divisions including transaction banking, asset and wealth management, and its own-branded retail businesses.

Cost cuts, which are likely to include layoffs, will play a large role as Deutsche withdraws from low-margin services and grapples with sweeping changes in the financial industry that have seen most of its European rivals like UBS (UBSG.VX) already retreat from capital markets.

“It’s a very difficult and complex path,” said Omar Fall, equity analyst at investment bank Jefferies. “But at least they’re being proactive about doing something about the structure of the business, which is different from the past, when they would just raise new capital and say ‘trust me it’ll be different this time.’”

The decision comes at a tumultuous time for co-chief executives Juergen Fitschen and Anshu Jain.

U.S. and British regulators fined Deutsche a record $2.5 billion on Thursday for trying to manipulate benchmark interest rates. The bank has said that neither Jain, who was running the investment bank at the centre of the scandal, nor other management board members were found to have been involved or aware of the trader misconduct.

Fitschen, meanwhile, will stand trial on Tuesday in Munich over allegations that he and other former executives worked to precipitate the collapse of the Kirch media empire in order to generate bountiful advisory fees to restructure the group. [ID: nL5N0W43E3]

Fitschen has said publicly that he “neither lied nor deceived” in the Kirch case.

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Friday’s plan marks a strategic about-face for the two men, who until recently were trumpeting Deutsche as Europe’s “last man standing” in investment banking and vowing to vacuum up capital markets business left by retreating rivals.

Since the two took charge in 2012, Deutsche shares have climbed only 22 percent, well below the 84 percent gain for the Stoxx European Banks index (.SX7P). Hopes for a restructuring have caused Deutsche's stock to rally in recent weeks.

The group has brought forward publication of its first quarter results to Sunday and will unveil full details of its strategic review on Monday.

Quarterly net income is expected to drop 40 percent to 655 million euros despite near-record revenue due to costly legal charges, according to a poll of five analysts.

As part of its investment banking cuts, Deutsche is expected to reduce its repo business and its prime brokerage division, which provides loans and other services to hedge funds.

The choice to offload only Postbank, which Deutsche bought in steps for around 6 billion euros ($6.5 billion) starting in 2008, is a concession to ratings agencies concerned that a complete exit from retail in favour of investment banking would raise Deutsche's risk profile.

It is also a nod to concerns in Berlin that a total retail exit would see the country's flagship bank lose touch with its home market, where Deutsche Bank serves some 8.5 million retail clients through some 730 own-branded branches.

Trade union Verdi said re-floating Postbank would give the chain a new chance to grow. Deutsche said it would deconsolidate Postbank, signalling that its stake would fall to at least below 50 percent.

But the plan has its critics. “Selling Postbank is quite likely to exacerbate Deutsche Bank's problems,” wrote analysts at Societe Generale in a recent note. Deutsche will likely incur a loss on the sale. Its funding costs will also likely rise as bond investors worry about the loss of earnings diversification in the group, SocGen wrote.

(Editing by Philippa Fletcher, Carmel Crimmins and Maria Sheahan)