Deutsche Bank Disposing Of Polish Operations In Bid To Shore Up Balance Sheet

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Deutsche Bank (NYSE:DB) is reportedly in the process of exiting its retail banking operations in Poland – a move that will allow the German bank to raise some much-needed cash while also reducing its portfolio of non-core assets. Poland has been a key market for Deutsche Bank over the years, with the bank building a sizable retail as well as commercial banking presence in the country. But the low interest rate environment, coupled with fierce competition from government-backed local players, has hurt profits for Deutsche Bank Polska over recent years – leading to the bank’s decision to exit the market. Notably, the decision comes roughly six months after Deutsche Bank shuttered its brokerage unit in Poland (DB Securities) last November.

The sale of Deutsche Bank Polska will not be a straightforward affair, though, as Polish regulations disallow the sale of foreign-currency loans held by the unit. The bank is expected to split the unit so that it can sell its Polish loan portfolio to one of the remaining players while retaining its portfolio of foreign-currency loans, which will most likely be run off over coming years.

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We do not expect the sale to have a material impact on our $18 price estimate for Deutsche Bank’s stock. Our price estimate is slightly ahead of the current market price.

See our full analysis for Deutsche Bank

Deutsche Bank’s path to recovery since the economic downturn of 2008 has been much more difficult than that of most other global banking giants – especially its U.S.-based peers – because the bank draws a bulk of its revenues from Europe. As Europe has seen considerable economic uncertainty, this had a direct impact on Deutsche Bank’s results over the years. In addition to relatively soft operating results, the bank has also had to contend with a long list of legacy legal issues, while stricter regulatory requirements forced it to shore up its balance sheet. The bank’s ongoing struggle to transform its business model is no secret, with its latest large-scale reorganization plan being revealed in March (see Understanding The Impact Of Deutsche Bank’s New Reorganization Plan On Its Long-Term Value).

Deutsche Bank’s new reorganization plan predominantly focuses the bank’s efforts in Germany and just a handful of key economies in Europe, Middle East, North America and Asia Pacific. A few factors likely contributed to Deutsche Bank’s decision to exit Poland, including low interest rates, and the introduction of regulations by the Polish government that target banks in general and foreign banks in the country in particular. While a bank-specific tax and annual mandatory payments to a guarantee fund hurt the bottom line for all Polish banks, foreign banks have also had to contend with direct government support for local players.

Deutsche Bank Polska is currently the twelfth largest bank in Poland by total assets. According to Deutsche Bank’s annual report for 2016, the unit held about €7.4 billion in outstanding loans and another ~€1 billion in commitments at the end of 2016. This represents total loans and liabilities of about €8.4 billion, of which loans worth €3.2 billion are denominated in euros or Swiss francs. [1] As Polish regulators require foreign banks to retain all foreign-currency loans even if they exit the country, Deutsche Bank Polska can sell just over 60% of its loan portfolio to a potential suitor. Likely candidates for a deal are Polish arms of other foreign banks who are much larger than Deutsche Bank Polska, and can benefit from improved economies of scale despite industry headwinds. Deutsche Bank is expected to make roughly $450 million from the sale of the Polish unit.

Revenues for Deutsche Bank Polska are included as a part of Deutsche Bank’s Private and Commercial Banking Revenues in our analysis of the bank. As the bank’s annual report revealed that the unit made net revenues of just €259 million for full-year 2016, the sale is not expected to have a material impact on total revenues.

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Notes:
  1. Deutsche Bank looks to sell its Polish business, Reuters, Nov 8 2016 []