* Credit correlation book sale designed to improve capital
* Sale subject to regulatory approval
* Bank targets EUR16bn RWA reduction from non-core unit
* Two hedge funds in running to buy portfolio
By Christopher Whittall and Alex Chambers
LONDON, Feb 1 (IFR) - Deutsche Bank is poised to
sell a complex credit trading portfolio as it seeks to
drastically reduce its risk-weighted assets (RWAs) and rebuild
The bank intends to shed EUR16bn of RWAs from its non-core
operations unit by the end of March, via the sale of its
so-called correlation book, according to a person with knowledge
of the deal.
"There is a process to sell the correlation book right now,
that should get regulatory approval," said the person.
"This disposal would more or less achieve the targeted
reduction in RWAs from the non-core unit."
Deutsche aims to sell over EUR100bn of RWAs by the end of
the first quarter in an effort to boost its core Tier 1 capital
ratio from around 8% to 8.5%.
On Thursday, the German lender announced a fourth-quarter
pre-tax loss of EUR2.6bn, its worst result in four years as it
tries to clean up its balance sheet.
The credit correlation book in question epitomises the type
of excessive financial engineering that prevailed in the run-up
to the 2008 crisis. The portfolio consists of credit default
swaps which were used to create synthetic exposure to companies,
often known as synthetic collateralised debt obligations.
Regulators lumped these types of trades with hefty capital
charges under Basel III: Deutsche's correlation book equated to
EUR18.3bn of RWAs at the end of September 2012 for what amounted
to only EUR2.4bn of assets under international accounting
Deutsche is following in the footsteps of other bloated
investment banks over the past couple of years. In perhaps the
most prominent example, Credit Agricole reduced its RWA by
EUR14bn with the sale of its correlation book to the credit
hedge fund BlueMountain Capital in February 2012.
"There's definitely been an uptick in prospective sales of
correlation books, with a number of European banks looking to
execute deals of substantial size quite soon," said Paul Wilson,
a portfolio manager at BlueMountain Capital.
Non-disclosure agreements meant Wilson could not divulge
details of the transactions. However, another credit market
source said UBS was one of the other banks looking to sell.
Unfortunately for these banks, they now face a buyer's
market. Not only are they all seeking to sell similar assets at
the same time, the number of potential buyers has shrunk. Other
banks are wary of the punitive risk weightings associated with
One market source said that two credit hedge funds were in
the running to purchase the Deutsche portfolio.
"The complexity of the portfolio means there aren't many
buyers, but one has been found and we are confident the sale
will go through," said the person with knowledge of Deutsche's
"It would be possible to sell it at a loss to carrying value
because of the huge amount of RWA it consumes, as long as the
sale makes a significant contribution to the capital build of
Deutsche has been de-risking its synthetic CDO positions
since the financial crisis of 2008. The portfolio shrunk 74%
between 2010 and the end of 2012, from EUR200bn to EUR53bn.
Around a quarter of this came from trades maturing.
The correlation book is run by Pius Sprenger, a
long-standing veteran of Deutsche's asset-backed and CDO trading
desk. It was transferred to Deutsche's non-core operations unit
- labelled by its peers as a "bad bank" - last September.
The non-core unit is now overseen by Bill Broeksmit, who was
reportedly blocked by German regulators as a candidate to become
the bank's chief risk officer last year. The unit holds a
hotch-potch of assets, ranging from a Las Vegas casino to loan
portfolios, which amounted to EUR120bn at the end of June 2012.
Deutsche has managed down the non-core assets to EUR95bn by the
end of December, with the aim of reaching around EUR90bn at the
end of the first quarter this year.
While the strategy to hive off these assets is new, they
have been making losses for a long time. These amounted to
EUR3.5bn in 2010, EUR2.1bn in 2011 and EUR2.4bn in 2012,
according to Deutsche investor presentations.
OTHER ASSET SALES
The non-core unit had already reduced RWAs by EUR29bn by the
end of 2012. Much of this was achieved by selling EUR23bn of
low-rated securitisations. The market for these products has
recovered recently, although investors say deals can be hard to
"Banks would like to sell these assets when the market has
rallied and they are close to par, which gives us little
incentive to buy. They've been less willing to sell assets at a
discount price during the current crisis," said Gennaro Pucci,
head of PVE Capital, a credit fund.
Deutsche's prospective sale of its correlation book will
likely be the last major divestment from its non-core unit,
according to the person with knowledge of the situation, apart
from the sale of BHF Bank, a German private bank, which is
currently awaiting regulatory approval.