Deutsche Bank AG co-Chief Executive Officer John Cryan unveiled the firm’s biggest quarterly loss in at least a decade and may eliminate a dividend that’s stood since Germany’s postwar reconstruction as he tries to overhaul the firm without asking shareholders for more capital.
Europe’s biggest investment bank expects a third-quarter loss of 6.2 billion euros ($7 billion) after writing down the value of its two largest divisions and boosting reserves for legal costs. Its American depositary receipts tumbled 6.9 percent after thedisclosure late Wednesday as of 6:36 p.m. in extended trading in New York. Cryan, in a memo to staff, said employees will share some of the burden when the firm sets year-end bonuses.
The charges clear the way for a strategy that Cryan, who became co-CEO in July, is preparing to present later this month as he looks to shore up capital and boost profitability. Spending on regulatory and compliance costs have overwhelmed the firm’s efforts to cut costs.
Cryan “wants to start off with a clean slate,” said David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business.
The firm said it expects to book a 5.8 billion-euro writedown as higher capital requirements reduce the value of its investment bank and it adjusts the estimate of what it will receive in the disposal of Deutsche Postbank AG. Goodwill and intangible assets at the core of that adjustment were booked when the firm acquired businesses — including Bankers Trust in 1999 and Postbank in 2010 — for more than the market value of their net assets, Cryan wrote in his memo. The Frankfurt-based lender also is adding about 1.2 billion euros to its litigation reserves.
The writedowns and dividend recommendation “have to be factored in some way into our upcoming decisions on variable compensation for the year,” Cryan, 54, wrote in the memo posted on the firm’s website. Final decisions on bonuses haven’t been made yet, he said. “You have my personal commitment to try to achieve a fair balance between staff and shareholder interests.”
The impairment charges will dwarf the 1.9 billion euros in writedowns that Anshu Jain, Cryan’s predecessor, took during the fourth quarter of 2012, his first year in the top job. The bank’s latest announcement signals the magnitude of the challenge that it faces, with litigation issues set to persist for years to come, Goldman Sach Groups Inc. said in a note.
Deutsche Bank said it may cut or eliminate the annual dividend, which was 75 cents for last year. The company has paid a dividend since at least 1957, when Deutsche Bank was re-established as a centrally managed financial institution. The payout hasn’t been lowered since 2008.
The impairments announced Wednesday won’t have a “significant impact” on Deutsche Bank’s capital ratios, the bank said. The charges also include about 600 million euros on the carrying value of a 20 percent stake in China’s Huaxia Bank Co. The German lender said it “no longer considers this stake to be strategic.”
“This is the prelude to a potential share sale in Huaxia Bank, probably in April next year,” said Ma Kunpeng, a Shanghai-based analyst at Sinolink Securities Co. A lockup covering part of the holding expires April 26.
Deutsche Bank bought into Beijing-based Huaxia Bank, one of the smallest listed national lenders, in 2005 and its stake is now worth about $3.5 billion. Reuters reported in April that the German bank had received offers for the asset. Global firms including Goldman Sachs Group Inc. have sold stakes in Chinese banks in recent years as new rules require more capital be held against the investments.
Cryan, who will share the CEO post with Juergen Fitschen until May, inherited a strategy to boost returns by lowering expenses about 15 percent by 2020 and shrinking assets at the investment bank as much as 17 percent through 2018. The bank will release the details of its plan and final figures for the third quarter on Oct. 29.
“The sour pill always comes first,” Sebastien Pigeon, an analyst covering European financial firms at Morningstar Inc., said of Wednesday’s announcement. “You drop the bad news first, before the upcoming investor meeting to review his strategy.”
Cryan is seeking to avoid tapping shareholders for funds while focusing on reorganizing the bank to meet growing demands for buffers from regulators. In July he said “raising additional capital would not solve our core problem of reversing our low financial returns and our poor organic capital generation.”
Deutsche Bank had turned to Postbank to diversify its funding mix by boosting consumer deposits in the midst of the global financial crisis. With its disposal, Deutsche Bank will cut its workforce by about 15,000, and the lender is considering cutting 8,000 additional jobs, a person with knowledge of the matter said last month.