Deutsche Bank, Germany's biggest bank, is exploring shrinking its U.S. operations as mounting legal expenses threaten to eat into the firm's capital, according to two people with knowledge of the matter.
Such an option is being considered as part of the bank's broader strategy review, which evaluates businesses in the context of regulatory and capital requirements, said the people, who asked not to be identified because the talks are private. The supervisory board of the Frankfurt-based bank discussed the U.S. business at a recent meeting and the topic has come up in talks with U.S. authorities, said one of the people.
Deutsche Bank said last month that the U.S. Justice Department requested $14 billion to settle a probe tied to residential mortgage-backed securities, a figure that triggered a selloff in the shares and fueled investor concerns about the bank's financial strength. The bank had put aside 5.5 billion euros ($6 billion) for litigation at the end of June. Chief Executive Officer John Cryan, who's been cutting jobs to lower costs, has said he doesn't plan to raise capital and expects U.S. authorities to lower their initial demand.
"They can keep a small U.S. operation to basically serve German and European customers," Davide Serra, founder of Algebris Investments LLP, told Bloomberg Radio on Monday. "They don't need an operation to win customers from U.S. clients. You probably need less than half the people you currently have."
Sueddeutsche Zeitung, which reported on a possible U.S. pullback on Friday, cited an unidentified person close to the bank as saying that such a move would be more likely than a sale of the asset-management business. A spokesman for Deutsche Bank declined to comment.
Deutsche Bank rose 0.9 percent to 12.34 euros at 10:09 a.m. in Frankfurt. The company has lost about 46 percent of its market value this year, making it the fourth-worst performer on the Bloomberg Europe Banks and Financial Services Index, which slipped 22 percent.
Cutting back the U.S. business would affect mainly the investment bank, said one of people, because of the capital it requires. No final decisions have been made and discussions about the U.S. business continue, according to the people.
Germany's Die Welt am Sonntag reported over the weekend that Deutsche Bank may be forced to shrink its U.S. activities as part of a deal with the Department of Justice. While talks with U.S. authorities may include that topic, a U.S. retreat hasn't been mandated so far, said one of the people.
Under U.S. regulatory requirements, Deutsche Bank needs to have a certain amount of capital dedicated to funding its U.S. business. Shrinking it would be one way to reduce the firm's capital needs should the settlement with the Department of Justice exceed the amount the bank has put aside for legal disputes.
Such a move would leave the bank in a weaker position in one of the more profitable markets for investment banks. Deutsche Bank had 10,842 employees in North America at the end of 2015, about 10 percent of the 101,104 it employs worldwide.
"We would question any such move to cut back on the U.S. operations if it's likely to impact the long-term investment banking business as the U.S. is about 50 percent of the global revenue wallet," Kian Abouhossein, an analyst at JPMorgan Chase & Co. with a neutral recommendation on the shares, wrote in a note on Monday. "Overall, we believe Deutsche Bank needs to cut costs considering its poor cost efficiency, not change strategy yet again."
Under Cryan's restructuring plans announced last year, the lender is seeking to eliminate 9,000 jobs, including 4,000 positions in its home market. As part of his overhaul, Cryan has cut risky assets, suspended dividends and scrapped bonus awards. The CEO has already said the bank may not be profitable this year and may have to deepen cost cuts.
In a message to divisional chief operating officers on Wednesday, Deutsche Bank said hiring will be put on hold with immediate effect, people familiar with the matter told Bloomberg. The hiring freeze affects all divisions excluding some control functions such as compliance, the people have said.
Deutsche Bank, which houses Europe's largest investment bank, is also holding informal talks with securities firms to explore options including raising capital should legal bills require it, people familiar with the matter have said. The lender would also revisit selling its Deutsche Postbank consumer unit or parts or all of its asset-management division, they said.
"For Deutsche Bank, there's only one solution, which is to go on a diet," said Serra, who holds the bank's debt, including the riskiest securities. "I think the diet comes in the investment-banking division mainly and in my expectation you are looking at a third of reduction of the balance sheet and a third reduction of the number of staff overall in the next two to three years."
Deutsche Bank is scheduled to release third-quarter earnings on Oct. 27.