CRZBY Commerzbank Ag (PK)

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 (April 24, 2019).

Deutsche Bank AG executives have discussed creating a new unit to house unwanted assets and businesses that could be earmarked for closure, part of contingency planning under way should a possible merger with German rival Commerzbank AG fall through, according to people familiar with the matter.

Deutsche Bank for years has been retooling its strategy and management, promising to reinvigorate profits, repair compliance weaknesses and cut rising costs. Executives insisted publicly up until late 2018 that the bank should only consider deals after it heals itself. Now, deep into merger talks, it is looking at a potentially bigger cleanup effort than it previously signaled.

Planning for a possible no-deal outcome has taken on greater urgency at Deutsche Bank as merger talks have proven more complicated than proponents originally expected, the people said.

Staunch union resistance to massive job cuts needed for a deal to work financially have proved an especially difficult impediment since the two banks revealed in mid-March that they are exploring a potential tie-up. Deutsche Bank at that time described the merger talks as part of a strategic review aimed at boosting its profitability.

A new unit for disposing of assets and discontinued operations -- a so-called bad bank -- could be used flexibly, whether Deutsche Bank strikes a deal or not, some of the people said. A merger would likely require Deutsche Bank to make sizable cuts to parts of its investment bank, narrowing the scope of businesses to focus resources on more-profitable areas as part of a strategy overhaul, some of the people said.

Businesses the bank has eyed for possible downsizing include equities, equity derivatives and portions of rates trading. Deutsche Bank executives have signaled a strong commitment to areas like credit trading, debt underwriting and foreign exchange and cash management to serve corporate clients.

The discussions have been aimed at allowing the bank to map out potential capital needs, profit and cost forecasts while keeping its options open, some people close to the bank say.

Deutsche Bank has heard demands from investors to assess alternatives to a merger, by analyzing other options and how they would affect the bank's capital demands and balance of businesses.

The planning inside the bank includes discussions about shrinking portions of the global trading operations, which include chronically underperforming businesses with burdensome costs, some of the people said.

Deutsche Bank has explored options to reshape various pieces of the bank. Officials with its asset-management arm, DWS, have discussed a potential deal to combine with Swiss rival UBS AG's asset management business, among other options, according to people familiar with the matter. Such a deal would likely see Deutsche Bank remain DWS's biggest shareholder with a goal of growing the merged entity, with UBS owning a stake. DWS already is publicly traded, providing shares for currency in such a deal.

The talks aren't exclusive or guaranteed to result in a deal, and timing of any potential agreement is uncertain, according to a person close to the matter. Bloomberg earlier reported on the talks.

The bank is scheduled to report first-quarter earnings on Friday, raising pressure on executives to decide whether to pursue a deal with Commerzbank.

Paul Achleitner, chairman of the supervisory board, has said publicly that the bank would update investors on the merger talks by Friday. Executives on Tuesday still hoped to meet that deadline this week, people familiar with the matter said.

Deutsche Bank's struggling investment bank was a central focus of Commerzbank merger talks from the start. Investors have increasingly pressured executives to shed businesses that chronically lose money or barely break even. At least one prominent investor has urged Deutsche Bank executives to close its money-losing U.S. equities business and cut the equities operations elsewhere.

A new bad-bank unit would allow Deutsche Bank to wall off business lines it intends to close or de-emphasize as well as positions that take time to sell or run down. Deutsche Bank previously had a similar unit called noncore operations that it used to dispose of unwanted assets, many of them dating to the financial crisis. That loss-making unit reported revenues and other financial details distinct from the bank's core businesses.

Deutsche Bank closed the noncore unit in late 2016. In March 2017, the bank launched a share sale to raise EUR8 billion in capital. In the process, it designated a new pile of around EUR20 billion in risk-weighted assets as "nonstrategic." They were earmarked to be run down within the investment bank rather than as a new separate unit.

The return of discussions about a noncore unit highlight Deutsche Bank's continued difficulties in streamlining and cutting costs to focus on businesses where it has a competitive edge.

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

(END) Dow Jones Newswires

April 24, 2019 02:47 ET (06:47 GMT)

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