Is the Deutsche Bank purchase of Postbank just an accident waiting to happen? Or are the damned rescuing the drowned?
Although the purchase by Deutsche Bank (DB) of the remainder of Deutsche Postbank (PB) is being portrayed by the business media as just another acquisition – albeit big – it does coincide with two other developments in DB’s history: circulating rumours about its exposure to ClubMed debt, and (probably connected to this) its sudden need to double the capital requirement following Sunday’s regulator jamboree.
The Slog has been looking at some of the detail of this over the last few days. The results of this tedious process suggest motives not entirely in line with those being strung together between yards of jargon by DB itself.
Various statements and press releases have talked about ‘significantly enhancing Deutsche Bank’s revenue mix’, ‘ supporting the existing capital base to accommodate regulatory changes and business growth’, ‘reducing reliance on investment banking’ and so forth. But the fact is that DB’s interest in lots of retail customers is rather sudden; and little value was added by CEO Josef Ackermann last Friday:
“Deutsche Bank intends to secure the equity capital required for a planned consolidation of Postbank,” he confirmed, “As a result, we can expand our strong position in our home market, take a leading position in the European retail banking business and significantly enhance Deutsche Bank’s revenue mix.”
In 30 years of deal-watching, I’ve never known these statements to be anything much beyond bollocks. Alan Sugar was an exception to that general rule, but on the whole the general take-out is ‘let’s hear it for the deal’. During the Eighties particularly, smaller companies floating onto first the USM and then other smaller bourses drivelled on about ‘capital to assist international expansion’, without ever once mentioning that, the day after the deal, they were personally going to have £3-5 million more in the Woolwich than they had the day before.
Personal gain is hardly the reason for this deal. This one is more about survival for Deutsche Bank, and a bailout for Postbank. It is a gamble, and with the rights issue hoping to raise €9.8 billion, it’ll be the bank’s largest ever capital increase – as well as being Germany’s largest share issue since the €11 billion offering by Deutsche Telekom in 1999.
This isn’t just completing the option DB has had to buy more of PB via the original acquisition of 29.7% in 2008. That deal allowed for them to acquire only a further 18%: this one will take DB’s holding to over 60%, and the bank hopes to acquire the rest from Deutsche Post reasonably swiftly thereafter. Far from performing a tidying-up operation, Deutsche Bank is going to inherit a vast number of relatively ordinary German depositors. It’s hardly likely to start selling them credit default swaps: rather, the attraction is in the whopping increase it will get in access to cash flow. Cash flow, not profit….see later.
Postbank boasts roughly five million customer chequing accounts, and carries out approximately seven billion transactions each year. But this isn’t about headcount – as a result of the consolidation of Postbank, Deutsche Bank expects its retail banking operations to contribute revenues of above €10 billion annually. That could come in very handy over the next two years: in a roundabout (but very cost-effective) way, DB is getting a very cheap, instant cash hoard – something that would be the envy of folks like Lloyds and RBS.
It also gets a near-guaranteed Bundes-bailout when, sorry if, things go pear-shaped. By completing this move and having five million voters in tow, Deutsche Bank can relax, safe in the knowledge that it has effectively just become Germany’s Northern Rock: not so much too big to fail, as too politically important for any Bundeskanzler to ignore.
A glance through DB’s annual report for 2009 (December) illustrates just how entirely mad non-retail banking has become over the last twenty years. As usual, the main bonkers activity is derivative trading – the bit our own Vince Cable describes as ‘casino banking’.
Although DB’s all-up net cashflow last year was €52.6 billion, the total of derivative business was €1.4 trillion. 2009 derivative gambling was a less hairy year than the one before, but DB still lost €690 billion on it – and won €730 billion. To have a total sector of business thirty times bigger than your net cash flow is a deranged way to carry on; but even here we must remember that those deals put down by DB as winners in the accounts could very easily turn bad over the next twelve months.
Other considerations are also worthy of note. Not that this is unusual, but Deutsche Bank has two big tranches of long-term debt due this year and next – roughly equal tranches of €20 billion in each year. Deutsche Postbank’s net income will also come in handy as a contribution to those.
Despite his bullish-big-smile rationale quoted earlier in this post, before and during the EU stress testing in the summer, CEO Ackermann moaned incessantly about releasing ‘sensitive’ sovereign wealth exposure data, and spent a great deal of time in Basel lobbying for a softer capital requirement regime. In the event, he got a tougher one – and this must make any half-awake observer therefore wonder (especially in the light of him splashing out to buy the rest of DP) precisely what his anxieties were.
You’ll look long, hard and in vain in the Annual Report for evidence that DB has even had any involvement in sovereign credit – bank accounting is and always has been an exercise is surreality, smoke and mirrors – but grudgingly during the stress-test, the Bank fessed up to an exposure of €1 billion. If we work on the Barclays scale of lying, this will more likely be €6billion at least….but that’s pure conjecture on my part, he carefully observed.
Having said that, derivative swap packages also include sovereign securities….and remember the engorged nature of that little doozie in the Report & Accounts. But if this is all so dodgy and places the bank into the Bailout Club, why is Geli Merkel not cutting up rough about the acquisition of Postbank?
The answer is simple: Deutsche Postbank (were it anything other than a bank) would be deemed insolvent. Back to UK analogies again – in becoming a gigantic Northern Rock, DB is also doing what Lloyds did about the HBOS purchase – what it’s been told to do. How might PB be deemed insolvent?
If you strip out the intangibles of PostBank and compare it to practically any measure that has to do with collateral value, impaired assets, or loss allowances, this banks is trading while effectively bust. Using widely applied criteria like the Eyles test (don’t ask) PB shortfall versus tangible equity is 175%. And for most accountants, that means insolvent almost twice over.
I referred in an earlier post to the dawning of the Age of Desperation. But in the eurobanking sector, it will also be the Age of Desperate Deception. Deutsche Bank’s acquisition of Postbank is a case of the Hindenburg airlifting passengers off the Titanic. It’s merely another attempt by Germany to hide the awfulness of its banking liabilities.