DB Deutsche Bank Aktiengesellschaft

By Jenny Strasburg 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (September 20, 2018).

A senior investment banker at Deutsche Bank AG recommended earlier this year that the troubled German lender consider breaking itself up, and other long-term strategic options, to address its persistent competitive weaknesses, according to people familiar with the matter.

The proposal came from Charlie Dupree, Deutsche's head of mergers and acquisitions in the Americas before he left for JPMorgan Chase & Co. in June. His analysis, produced with other bankers over several months, was for internal purposes and wasn't intended to be made public, according to the people.

In April, Mr. Dupree shared his conclusions with Deutsche Bank's chief financial officer, James von Moltke. The finance chief considered the analysis well-intended but superficial, a person familiar with his feedback said.

Even so, the recommendations from a top deal-maker who had been with the bank since 2006 indicate how deep a rut Deutsche Bank is in. The firm faces high funding costs and a depressed share price, reflecting investor doubts about a turnaround.

Mr. Dupree's analysis suggested a breakup of the bank could eventually allow the investment-banking business, through a spinoff or public stock offering, to tap its own sources of funding, people familiar with the matter said. The banker, in his analysis and related conversations, also suggested a merger was increasingly likely for Deutsche Bank -- a view echoing widespread skepticism about the lender's ability to compete alone in the long-run.

Bankers, investors and analysts consider the most likely partner to be German rival Commerzbank AG.

Neither bank has directly addressed potential merger plans. There's no indication a deal is actively being planned, according to people inside and close to the bank. Deutsche Bank's supervisory board for now is sticking with the current structure and strategy, the people say. But the persistent speculation, much like Mr. Dupree's views, reflects debates that swirl continuously in and around the lender.

Over the past three years, Deutsche Bank has undergone multiple restructurings, suffered an exodus of senior executives, and faced some of the harshest reprimands from regulators dealt any major investment bank.

The Wall Street Journal reported in May that the U.S. Federal Reserve last year designated Deutsche Bank's sprawling U.S. business in " troubled condition," a rare slap-down.

As its shares have fallen and credit-ratings firms have downgraded its debt, Deutsche Bank's funding costs have risen, making profits harder to come by. Executives say they're focused on lowering those funding costs.

Questions about the bank's strategy and readiness to withstand financial and economic shocks are constant, people close to the bank's operations say.

This week, Chief Executive Christian Sewing is in Washington, D.C., to meet with U.S. regulators for the first time since he became CEO in April, some of the people said.

He'll be joined by Sylvie Matherat, the bank's chief regulatory officer and a management-board member, the top executive responsible for the bank's relationship with the Fed and other key overseers.

Mr. Sewing, Ms. Matherat and their peers on the management board have sought to reassure investors that the bank's strategy is on course, acknowledging that they must fulfill cost-cutting targets and other promises.

Mr. Dupree's take on the need for deeper structural change didn't gain much traction inside the bank.

In March, he sent his analysis to his New York boss, Mark Fedorcik, U.S.-based co-president of the investment bank. Mr. Fedorcik says he hasn't reviewed the analysis and declined to comment.

In April, Mr. Dupree met in Frankfurt with Mr. von Moltke. The meeting came at a tumultuous time. Deutsche Bank had just fired its CEO and appointed Mr. Sewing, a longtime Germany-based executive. Senior executives told investors and clients that Deutsche Bank would deepen its home-market focus but maintain a global presence, while cutting certain businesses, costs and staff.

Also in April, bank executives rejected a shareholder proposal pressing the lender to explore splitting the investment bank from the retail-banking unit. Executives said the option would cause "inferior economics and strategic outcomes" and "is not possible in the near-term."

Mr. Dupree conceded that his analysis wasn't fully baked, a person familiar with his thinking said. For one thing, he singled out the flagging performance of Deutsche Bank's markets business as a major hurdle to attracting investors to a spun-off investment bank, but didn't have easy answers for improving performance, one of the people said.

Mr. von Moltke welcomed the input, according to people familiar with his feedback, but felt that M&A bankers like Mr. Dupree are prone to want to break up companies and look to solve problems with deals. Mr. von Moltke shelved the report without discussing it with other bank executives.

In June, JPMorgan announced it had hired Mr. Dupree. His departure from Deutsche Bank was unrelated to the internal analysis, a person close to him said.

Write to Jenny Strasburg at jenny.strasburg@wsj.com

(END) Dow Jones Newswires

September 20, 2018 02:47 ET (06:47 GMT)

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