CRZBY Commerzbank Ag (PK)

By Jenny Strasburg and Eyk Henning 

Executives at Deutsche Bank AG are contemplating dramatic options for the German lender, including selling all or part of a key business, a sign of growing pressure to speed up a flagging overhaul.

This weekend, senior executives are meeting to debate some of these options, according to people familiar with the plans. One has already been floated: a merger with Germany's second-largest bank by market value, Commerzbank AG, the people said. Deutsche Bank and Commerzbank held preliminary discussions about a tie-up in August, before concluding last week it wasn't viable.

Chief Executive John Cryan, who was named co-CEO in July 2015, has set out a long-term plan of shrinking Deutsche Bank and cutting costs. But the merger discussions and the weekend summit signify that the bank may not have the luxury of a drawn-out revamp. On Wednesday, Mr. Cryan found himself on stage at a financial conference in Frankfurt batting back speculation about a merger.

For Deutsche Bank, 2016 has been an annus horribilis. Its shares are off 41% this year and now trade where they did in the mid-1980s. It has a long list of regulatory troubles compounded by a thin capital cushion and flagging performance in many key business lines that leave it more vulnerable than its peers.

To make matters worse, Britain's vote to leave the European Union rattled confidence across Europe's financial sector and posed problems for banks with large London workforces. Deutsche Bank runs big trading, advisory and asset-management operations from London and has more than 8,000 employees in the U.K., where it books almost 20% of its revenue, more than many non-U.K. peers.

Since the June 23 vote, Deutsche Bank's shares are down 15%, more than twice the decline of eurozone banks broadly. Shares in troubled rival Credit Suisse Group AG are down 2% since Brexit.

Deutsche Bank's market value is around $20 billion, a bit bigger than Buffalo, N.Y.-based M&T Bank Corp. Its profit in the second quarter fell 98%, to EUR20 million ($22.3 million), or around $200 per employee.

Deutsche Bank was once an ambitious powerhouse. It was a top deal maker across the continent and one of the few big European players competing head-on with the biggest U.S. banks on their turf. But this year has been humbling -- and Deutsche Bank seems to have few good options.

Mr. Cryan and other top executives have expressed aversion to a merger, people familiar with internal bank discussions said. He, like many analysts and investors, has said that regulatory hurdles alone could make such a tie-up far-fetched.

Instead, Mr. Cryan, who became sole CEO earlier this year, has pushed to go it alone. In October, he unveiled new financial targets and a five-year overhaul plan.

That was before European banks had to face the increasing pain of lower and negative interest rates. That squeezes profits in retail banking.

As part of a continuing review of strategic options, the bank in recent weeks has analyzed possibilities including selling all or part of its asset-management business, people close to the matter said. Deutsche Bank executives want to keep most of the business, the people say. They see the steady returns as ballast against volatile profits from the bigger trading and investment-banking businesses.

But small pieces of the asset-management division could be deemed ripe for sale, people briefed on internal discussions said.

Deutsche Bank executives also are discussing whether to adjust Mr. Cryan's October financial targets, such as profit goals, the people said.

"We do have confidence in the management team," says Laurie Mayers, a European banking analyst with Moody's Investors Service. "But Brexit is unwelcome additional pressure when they already have quite important issues to address."

Moody's rates Deutsche Bank Baa 2, two notches above junk level. One factor: the lender's heavy dependence on its trading business.

That business has been under pressure this year. In May, the bank's finance chief told a large investor that about two dozen trading clients had capped the volume of their trades with the bank, according to a person familiar with the conversation. Deutsche Bank said client activity subsequently picked up.

Deutsche Bank is a tough ship to turn around. It has big business lines in sales and trading of stocks and bonds -- once-lucrative zones that have shrunk amid regulatory change and stiff competition. Its retail-banking business is concentrated in Germany, a cutthroat market full of regional savings banks.

And Deutsche Bank has a massive book of hard-to-value derivatives. The riskier derivatives have become harder to sell after Brexit, analysts say. Since 2007, the bank has culled its so-called "Level 3" assets, which include distressed debt and complex derivatives, to EUR29 billion as of the second quarter, a 67% decrease from 2007.

But Level 3 assets still equate to about 47% of shareholder equity, a ratio much higher than at the biggest U.S. investment banks.

Thanks in part to these exposures, the International Monetary Fund this summer called Deutsche Bank the No. 1 contributor to systemic risk among the biggest global banks. And soon after, in stress tests, European regulators concluded that Deutsche Bank would have enough capital to withstand a severe downturn -- but only barely.

Such developments have led investors to ask: Will Deutsche Bank have enough capital to absorb possible trading losses or outstanding fines? And is it moving fast enough to reach that point?

Deutsche Bank needs to generate about EUR7 billion in capital by 2019, analysts say. Building capital "organically," as Mr. Cryan's team wants to do, is hard work: The bank must improve earnings and conserve them. Shareholders also have been put off by the elimination of two years of dividends.

Bank executives don't want to sell new shares to raise capital, Citigroup banking analyst Andrew Coombs said in a recent note, but there might not be a choice. "Capital concerns won't go away," he wrote.

--Madeleine Nissen contributed to this article.

Write to Jenny Strasburg at jenny.strasburg@wsj.com and Eyk Henning at eyk.henning@wsj.com

(END) Dow Jones Newswires

August 31, 2016 16:59 ET (20:59 GMT)

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