Blog Coverage Deutsche Bank Hives off its UK Insurance Unit to Phoenix Group

LONDON, UK / ACCESSWIRE / September 29, 2016 / Active Wall St. blog coverage looks at the headline from Deutsche Bank AG (NYSE: DB) as the company announced on September 28, 2016 that it had finalized an agreement with Phoenix Life Holdings Limited to sell its UK based Abbey Life business. The deal is valued at £935 million, or around $1.2 billion based on current exchange rates. Register with us now for your free membership and blog access at:  http://www.activewallst.com/register/.

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Deutsche Bank owned Abbey Life by way of Deutsche Asset Management. As per the sale agreement, Phoenix Life Holdings Limited (a subsidiary of Phoenix Group Holdings Limited) will acquire the complete business of Abbey Life which includes Abbey Life Assurance Company Limited, Abbey Life Trustee Services Limited, and Abbey Life Trust Securities Limited. The transaction is subject to approvals from regulatory bodies including Prudential Regulatory Authority.

Commenting on the sale, John Cryan, Chief Executive Officer of Deutsche Bank, said:

“We are pleased to have reached this agreement with Phoenix Group. 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.”

Implications:

For Deutsche Bank

Deutsche Bank had acquired Abbey in 2007 for £977 million and has been looking at selling it off since the last one year. For Deutsche Bank the sale means it will face a pre-tax loss of around €800 million (approx. $ 895 million); however it will mainly be write-offs in terms of goodwill and other intangible assets. The sale will also result in influx of cash which will increase Deutsche Bank’s capital ratio by 10 basis points.

Deutsche Bank has been under financial pressure and CEO John Cryan has been working towards overhauling the entire organization, increasing cash and assets base. New European regulations, which mandate more capital against any assets as well as low interest rates, have played a major role in pushing the sale.

For Phoenix Group Holdings

Acquisition is a part of Phoenix Group’s long-term strategy for growth in a low interest market scenario. In May 2016, Phoenix Group via its subsidiary Pearl Life Holdings had acquired AXA’s UK investment and pensions business. With the current acquisition, Phoenix Group will add £10 billion of assets under management (AUM) and around 735,000 new policyholders. From purchase of Abbey Life, Phoenix Group expects to earn £0.5 billion cash flows for the period 2016–2020. From 2021 onwards the cash flows are expected to increase to £1.1 billion which will help the company’s plans to increase dividends for its shareholders.

Phoenix Group plans to fund its acquisition of Abbey Life with a bank lending to the tune of £250 million and a sale of equity with a rights issue valued at £735 million.

Legal hurdles

Deutsche Bank is under financial pressure and its stock has been hit hard in recent times. It has been looking at raising funds either from asset sale or any other means to improve its balance sheet. The public offering of Deutsche Bank’s German Postbank consumer division was also put on hold. The US Department of Justice is demanding $14 billion from Deutsche Bank as settlement for probe into sale of mortgage-backed securities during the pre-crisis period.

Another legal tangle is linked with the current asset sold – Abbey Life. UK’s insurance regulatory body – Financial Conduct Authority – has been investigating Abbey Life’s annuity sales and other practices which could lead to claims from policy holders or fines. As one of the conditions of sale, Deutsche Bank has agreed to indemnify Phoenix Group against possible future claims to the extent of $228 million. The resultant legal fees are going to take a toll on Deutsche Bank’s reserves.

Stock Performance

On Wednesday, September 28, 2016, Deutsche Bank’s shares closed the trading session at $12.30, jumping 3.19% from its previous closing price of $11.92. A total volume of 14.47 million shares exchanged hands at the end of the day, which was higher than the 3-month average volume of 5.77 million shares. At the close yesterday, the stock’s market cap was $17.01 billion.

Analysts and industry experts have been speculating that unless the parent bank manages to raise fresh capital or the German government steps in to bailout the bank, its survival is hanging on a thin thread. In either scenario investors will take a hit. The worst case scenario if Deutsche Bank topples could lead to a major financial and banking crisis globally.

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