To comply with the tougher regulations by the Federal Reserve on foreign banks, Deutsche Bank AG (NYSE:DB) plans to trim its U.S. assets by $100 billion. The lender aims to reduce assets held in its U.S. unit by transferring some operations to Europe or Asia.
Deutsche Bank’s move comes following the Fed’s confirmation last week that foreign banks operating in the U.S. would have to strengthen their capital and liquidity position to better combat another financial meltdown.
The new rules laid by the Fed are for foreign banks with $50 billion or more in assets in America includes establishment of an intermediary holding company in the U.S. Further, the foreign bank operations will be required to maintain capital equal to 4% of their assets as compared with the largest American banks, which will be maintaining a leverage ratio of 5%. Notably, the new rules will be effective from Jul 2016, while the leverage ratio requirement will not be applied until 2018.
The Frankfurt-based bank targets to trim its $400 billion balance sheet in the US (excluding the $200 billion held as branch assets that does not fall under the new rules) to nearly $300 billion. Consequently, the company plans to transfer certain operations to other areas including Mexican arm and the Frankfurt and Tokyo-based repo operations that are currently part of its U.S. business.
Deutsche Bank will also shrink a substantial part of its repo business in the U.S, as the bank is losing clients for other lucrative offerings. Notably, this highly capital-intensive business though with minimal margin was being offered to hedge fund clients to generate other profitable business from them.
Moreover, the company aims to convert some of its U.S.-unit owned debt to its German unit as hybrid debt to transfer it into equity capital that would help in fulfilling the stricter regulatory guidelines. Further, in an attempt to improve its leverage ratio in Europe, Deutsche Bank is awaiting German regulators’ approval to raise roughly €6 billion in additional capital through hybrid debt.
Although these stringent capital rules will significantly improve the financial sector’s long-term stability and security, they will be a major handicap to foreign banks like Barclays PLC (BCS) having substantial U.S. operations. Amid a sluggish operating environment in Europe, Deutsche Bank was expecting to augment profits from its foreign operations in the near term. However, these rules might limit its flexibility to operate in U.S.
Deutsche Bank currently carries a Zacks Rank #3 (Hold). Some better-ranked foreign banks includeMitsubishi UFJ Financial Group, Inc. (MTU) and The Royal Bank of Scotland Group plc (RBS). Both these stocks have a Zacks Rank #2 (Buy).