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Deutsche Bank to Boost Capital Position with Abbey Life Sale


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Deutsche Bank AG (DB - Analyst Report) inked a deal to sell its U.K. insurance business, Abbey Life, for $1.09 billion to Phoenix Life Holdings Limited, a unit of Phoenix Group Holdings Limited. The deal is subject to regulatory approvals, including Prudential Regulatory Authority. The move comes in the wake of the bank’s efforts to boost its capital position.

Phoenix Group Holdings, the UK’s major specialist closed life and pension fund consolidator, will acquire the Abbey Life business – Abbey Life Assurance Company Limited, Abbey Life Trustee Services Limited and Abbey Life Trust Securities Limited – held within Deutsche Bank’s asset management wing.

The German banking giant, currently under investors’ close tabs due to concerns over its financial health, expects to have a net positive capital impact following closure of the sale. In its release, Deutsche Bank noted that on a pro-forma basis, the sale would have enhanced the bank’s Common Equity Tier 1 capital ratio (CRR/CRD 4 fully loaded) by around 10 basis points as of Jun 30, 2016.

However, the transaction is likely to result in pre-tax loss of around €800 million, mainly due to impairment of goodwill and intangible assets.

John Cryan, Chief Executive Officer of Deutsche Bank, stated, “Deutsche Asset Management will continue to focus on its core businesses of Active, Passive and Alternatives, while this transaction will also strengthen Deutsche Bank’s capital position. We continue to build a simpler and better Deutsche Bank.”

Earlier this month, Phoenix Group confirmed that it was in advanced discussions with Deutsche Bank regarding the acquisition of Abbey Life.

Deutsche Bank had acquired Abbey Life in Oct 2007 for around £1 billion. It began exploring the sale of its British insurance unit last October. Apart from Phoenix, several companies, including Swiss Re AG and Britain’s Legal & General Group Plc, had earlier shown interest.

Notably, in January, Cryan had mentioned that the bank was reviewing strategic options for Abbey Life, adding that the business did not align with its asset management business. This Bournemouth-based company is among the several firms currently under probe by the UK’s financial watchdog – the Financial Conduct Authority – related to their practices on exit fees.

Bottom Line

Deutsche Bank’s latest move comes as a slight relief at a time when investors’ sentiments have been weighed down due to concerns over the bank’s capital position. This has been triggered by the potential $14-billion accord with the U.S. Department of Justice (“DoJ”).

While the company has no intention to pay the amount sought by the DoJ, anything substantial will certainly compound woes for Deutsche Bank. The bank has shouldered significant legal settlement in the past as well, which affected its financials. Notably, it reported net loss of €6.8 billion in 2015, its first full-year loss since 2008 reflecting the impact of several one-time items, including huge litigation charges.

Nevertheless, revenue challenges should ease gradually as Cryan is expediting Strategy 2020 efforts to revamp the bank with focus on simplifying the bank’s business model, reducing costs and shedding unprofitable businesses.

Some stocks in the foreign banks space worth considering include Itaú Unibanco Holding S.A. (ITUB - Analyst Report) , Banco Macro S.A. (BMA - Snapshot Report) and The Bank of Nova Scotia (BNS - Snapshot Report) .

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