Troubled German banking behemoth Deutsche Bank (IOB: 0H7D.IL - news) revealed Sunday a major shift in strategy, saying it plans to increase capital by issuing shares and renew its focus on its home market.
The Frankfurt-based bank will issue almost 690 million new shares in early April, with subscription rights for existing shareholders, to raise about 8.0 billion euros ($8.5 billion), chief executive John Cryan said during a conference call.
Deutsche Bank had signalled such a move on Friday, but it is still a significant about-face for Cryan, who insisted until recently that the bank did not need to raise capital.
As well as the capital increase, the bank plans to retain its Postbank subsidiary and to partially float its Deutsche Asset Management unit -- itself valued at around 8 billion euros by analysts -- within 24 months.
The plan to offer shares in the asset management business must be approved by German financial regulator BaFin.
Going forward, Deutsche Bank will be reorganised around three divisions: private banking and wealth management; asset management; and corporate and investment banking.
Executives hope that Sunday's announcement will mark a new chapter for the bank, which has struggled to make a profit in recent years as it faced low interest rates and mammoth fines -- as well as a costly restructuring drive that Cryan launched when he took the helm in 2015.
The bank reported a net loss of 1.4 billion euros for 2016.
- Volatile year -
Last year saw a number of scares about Deutsche Bank's ability to resist financial shocks, as it emerged among the weakest performers in the European Central Bank's stress tests and had to negotiate with the US Department of Justice (DoJ) over a $14 billion fine sought for its role in the subprime mortgage crisis.
Shares (Berlin: DI6.BE - news) in the bank plunged at several points throughout the year, including when news of the DoJ's demand became public in September and when several hedge funds later withdrew investments.
While Deutsche Bank ended up negotiating its US fines and compensation down to about $7 billion, the perception of weakness remained.
Proceeds from the new shares will bring the bank's core capital ratio -- a key indicator of the bank's solvency and resilience -- to 14.1 percent from 11.9 percent at the end of last year.
That figure "will help us remove a source of uncertainty and thus reduce our refinancing costs," Cryan said, "and also increase confidence in us as a counter-party and encourage clients to deepen their relationship with us."
The bank aims to further increase its capital cushion by selling parts of its vast asset portfolio, bringing in a further two billion euros.
- Turning inward -
By integrating Postbank -- long slated to be sold as soon as it could fetch the right price -- and reorganising its corporate and investment banking units, Cryan argued that Deutsche Bank would "strengthen significantly our leadership in Germany, where our roots are, while also maintaining our global reach."
A renewed focus on Germany is a new direction for the bank, as many of its 8,000 open legal cases worldwide date back to its attempts to go toe-to-toe with British and American banking giants before the financial crisis.
With (Other OTC: WWTH - news) conscientious savers and high-performing small and midsize companies, Europe's largest economy offers a reliable income if not the sky-high profits of financial market adventures.
But banks in Germany face challenges, including low interest rates set by the European Central Bank and intense competition for clients' cash in a market crowded with small banks.
Merging Postbank with Deutsche's retail banking operations will create a bank with 20 million customers, offering economies of scale and synergies amounting to 900 million euros a year by 2022, Cryan said.
Around 9,000 job cuts in Deutsche Bank's network of German branches have long been a part of Cryan's plans.
Meanwhile, the group will "take advantage of the resurgence in client activity" in corporate and investment banking and find more savings by merging its corporate finance, global markets and global transaction banking units into a single division.
Altogether, the restructuring aims to reduce costs from 24.1 billion euros in 2016 to around 21 billion euros by 2021 -- after one-off items for restructuring and layoffs totalling around two billion euros.