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Deutsche Bank took its pain but is it now poised to gain?

The Wall Street Jour­nal

Deutsche Bank has avoid­ed the worst of the bank­ing car­nage by pulling off a series of trades that have light­ened its load of soured invest­ments. While it still could need to write down assets or raise cap­i­tal, Ger­many’s largest bank by mar­ket val­ue is posi­tion­ing itself to be an acquir­er in the sec­ond half.

Behind the strat­e­gy are its co-heads of invest­ment bank­ing, Anshu Jain and Michael Cohrs.

In the past three months, Deutsche has found buy­ers for cor­po­rate loans, reduc­ing the bank’s port­fo­lio to at least €25bn ($39.25bn) from €33bn in March.

They will get a report card when Deutsche posts results Thurs­day.

A year into the cred­it crunch, new wor­ries are loom­ing over banks, such as increased con­sumer loss­es in the US and Europe, and dete­ri­o­rat­ing cor­po­rate loans.

Banks in Europe are expect­ed to report bil­lions of dol­lars in write-downs for invest­ments tied to mort­gages and oth­er assets when they post midyear results in com­ing weeks.

Bank stocks have been bat­tered. Deutsche’s shares in Ger­many this year have fall­en 35%, rough­ly on par with the Dow Jones Euro Stoxx Banks index, which is down 31%.

Still, Deutsche’s stock has out­per­formed rivals such as Lehman Broth­ers and Roy­al Bank of Scot­land, which have seen drops of about 75% and 45%, respec­tive­ly.

Jain and Cohrs’s strat­e­gy comes at a cost.

Deutsche took a loss on sell­ing real estate in New York, though it got some of the prop­er­ties off its books.

In Las Vegas, the bank has had to take respon­si­bil­i­ty for the Cos­mopoli­tan Resort Casi­no, an unfin­ished $3.9bn project it orig­i­nal­ly financed for US devel­op­er Ian Bruce Eich­n­er.

Rather than sell the prop­er­ty in a weak mar­ket and have to finance the buy­er, Deutsche has decid­ed to com­plete con­struc­tion on its own and seek assis­tance from out­side investors.

Lehman ana­lyst Jon Peace and oth­ers expect Deutsche to post a write-down in the range of €2bn to cov­er lever­aged and com­mer­cial-prop­er­ty loans in the sec­ond quar­ter.

Some ana­lysts also say that Deutsche may have to write down some of the €9bn in insur­ance it used to hedge mort­gage-secu­ri­ties risk.

“Deutsche Bank has been bet­ter at weath­er­ing the storm,” said Guy de Blon­ay, a fund man­ag­er at New Star Asset Man­age­ment in Lon­don. Even so, de Blon­ay has­n’t pur­chased Deutsche Bank shares because he remains con­cerned about more write-downs.

Some ana­lysts and investors wor­ry that the bank has­n’t marked down its com­mer­cial real-estate and cor­po­rate loans as steeply as com­peti­tors. But Deutsche has said the val­ues it puts on such debt reflect the qual­i­ty of the loans.

Last month, David Williams, an ana­lyst at Fox-Pitt Kel­ton Cochran Caro­nia Waller, said he expects that Deutsche might have to raise €3bn to remain well-cap­i­talised.

Deutsche, though, is count­ing on client mon­ey from retail and pri­vate-bank deposits to enable it to stave off fund rais­ing that oth­er banks have need­ed to weath­er their loss­es, a per­son famil­iar with the sit­u­a­tion said.

Deutsche recent­ly said it would be prof­itable in the sec­ond quar­ter, and it would­n’t need to raise mon­ey.

It record­ed a €2.7bn write-down for its loans tied to com­mer­cial prop­er­ty and cor­po­rate buy­outs and a net loss of €141m in the first quar­ter.

On Thurs­day, Switzer­land’s Cred­it Suisse defied ana­lysts’ expec­ta­tions by post­ing a 1.2bn Swiss franc ($1.16bn) prof­it after min­i­mal write-downs, which bodes well for Deutsche’s results.

The Swiss bank also was able to sell 6.5bn francs of cor­po­rate loans in the sec­ond quar­ter, reduc­ing its port­fo­lio to 14.3bn francs.

Jain and Cohrs both arrived in 1995 as part of Deutsche’s big hir­ing push to expand invest­ment bank­ing.

The 45-year-old Jain joined from Mer­rill Lynch, and Cohrs, 51, from the for­mer SG War­burg, now part of UBS.

As co-heads of the invest­ment bank, Jain over­sees sales and trad­ing of stocks, bonds and oth­er prod­ucts, while Cohrs han­dles the merg­ers and cor­po­rate-lend­ing busi­ness­es.


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