December 5, 2017 / 3:15 PM / a year ago

Breakingviews - Deutsche Bank fund IPO raises perverse paradox

A Deutsche Bank logo adorns a wall at the company's headquarters in Frankfurt, Germany June 9, 2015

LONDON (Reuters Breakingviews) - In psychology, disassociation is a common reaction to childhood trauma. Deutsche Asset Management can be forgiven for wanting to put some distance between itself and parent Deutsche Bank after suffering 38 billion euros in asset outflows last year as a result of the German lender’s ordeal. By rebranding itself ahead of an expected IPO, however, the group that oversees 711 billion euros perversely highlights its current owner’s blemishes.

Forget the ballyhoo about DWS being a “global brand”; in reality the new name is little known outside Germany. But at least it sidesteps the distressing “Deutsche” signifier. A new arms-length legal structure apparently weakens the association further. And yet the chosen structure also ensures ongoing parental control. Even if Deutsche Bank’s shareholding drops below 75 percent, it can still appoint the management board without consulting minority shareholders.

In return, the asset manager is buttering up prospective investors with a suite of respectable medium-term targets. Projected growth in net assets of 3-5 percent a year compares well enough with peers. And though executives insist they are not looking to cut jobs, a target cost-to-income ratio of 65 percent, against 68 percent so far this year, suggests they expect to hold expenses steady. Meanwhile the projected dividend payout ratio of up to three-quarters of earnings – compared with 65 percent at rival Amundi and 47 percent at Standard Life Aberdeen – will catch the attention of income investors.

If those targets are achieved, the business could be worth 11 billion euros, according to Breakingviews calculations assuming a 25 percent tax rate and a 15 times earnings multiple for 2018.

The prospect of such largesse contrasts with Deutsche Bank, which has nixed meaningful dividends since 2015. Granted, a pledge to return to “a competitive payout ratio” by next year could be fulfilled by returning the IPO proceeds to shareholders. But by sacrificing a portion of its most consistently profitable division, Deutsche Bank will dilute the already risible 4.1 percent annualised return on tangible equity it achieved in the first nine months. CEO John Cryan is aiming for a 10 percent return. Selling off its asset management arm only makes that harder.


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