Selling asset management would make the bank more investable, but less attractive
Machiavelli described a promise as a necessity of the past. A broken promise is a necessity of the present. Such cunning is not lost on Deutsche Bank. Last month chief executive John Cryan pledged that the asset management business — which has €719bn in assets under management (AUM) — would remain an “essential” part of its business. Now, the bank is considering selling at least some of it via an initial public offering in order to raise capital.
An IPO is not an outright sale, so the spirit of the promise would be kept. And a partial float of asset management would be entirely sensible. Deutsche had planned to sell some of its 94 per cent stake in already-listed Postbank. But amid negative interest rates and state-subsidised competition, investors’ appetite for German retail banks is hardly roaring.
Asset management is the only one of Deutsche’s divisions to have raised its returns on equity over the past three years (from 13 per cent to 16 per cent in 2015). Its low capital requirements, rising AUM and high proportion of recurring fee income are attractive.
It made €1.2bn in pre-tax profit last year. Assuming investors value it around 12 times that (UniCredit’s Pioneer asset management arm attracted a similar multiple) then listing a 25 per cent stake could fetch around €3.6bn, equivalent to nearly 100 basis points of capital. Throw in the proceeds of Huaxia and Abbey Life (50 basis points combined) and Deutsche’s core tier one capital ratio rises from 10.8 per cent to about 12.3 per cent. If US misconduct fines are within Deutsche’s €5.5bn legal provisions (admittedly, a pretty big if) then recent existential fears around the bank suddenly look a bit silly.
But the bank would forgo some of the division’s future profits, diluting still further its 5 per cent return on equity (net of litigation charges). That is the dilemma: selling this business makes Deutsche Bank both more investable, and less attractive.