NEW YORK (Reuters) - Deutsche Bank DBKGn.DE has set aside over 1 billion euros ($1.1 billion) to cover the cost of offloading derivatives in its 'bad bank,' or capital release unit, three sources at the bank told Reuters.

FILE PHOTO: The logo of Deutsche Bank is pictured on a company's office in London, Britain July 8, 2019. REUTERS/Simon Dawson/File Photo

The cost, which has not been publicly disclosed, is included within the 7.4-billion euro budget the German lender has set aside for its restructuring, which will also see 18,000 jobs axed as the bank exits unprofitable businesses.

Key to the restructuring is the creation of a ‘bad bank’ to house 288 billion euros of unwanted assets earmarked for sale or wind-down, including equity derivatives and long-dated interest rate and credit derivatives.

Deutsche Bank is still assessing and gauging interest in the assets before repackaging some for sale, the sources said.

Deutsche Bank declined to comment.

The bank will run a formal auction of its equity derivatives book, which Reuters reported last week had garnered “significant expressions of interest” from U.S. and European banks, over the next two months, the sources said.

After that, it will attempt to sell portfolios of long-dated interest rate and credit derivatives. Those assets have low returns and require high levels of capital to be held against them, making them less attractive to buyers. As a result, Deutsche Bank may have to offer deep discounts to offload them, the sources said.

Deutsche Bank executives believe they have made a conservative assumption of the cost of offloading the derivatives and are confident that writedowns will not exceed their expectations.

However, if the cost of exiting the positions were to be higher than anticipated, the bank would likely have to hold some of the derivatives positions beyond the 2022 deadline it has set for offloading them, the sources said.

The alternative would be to take deep writedowns and raise funds from shareholders to cover the extra losses, something it has ruled out doing. It is not certain investors would even back such a move, having already stumped up 29.3 billion euros in four capital raises since 2010.

The bank has targeted reducing assets held in the unit to 119 billion euros this year and 9 billion euros by 2022.

Consultants questioned whether the bank can achieve that target while keeping within its budget.

“If they have some really smart structures in mind and are prepared to take deep discounts that may be achievable, but if they want to do it in an orderly fashion and limit the downside I’d say they’re looking at 5 years,” said Robert Cranmer, a partner at financial services consultancy Sionic.

Mayra Rodriguez Valladares, managing principal at consultancy MRV Associates, said the bank will face significant administrative costs on top of writedowns from asset sales.

“I think this is going to cost a lot more. I don’t see how they’re going to get away with this little expense to wind all this down,” she said. “Deutsche will have to hire external auditors to make sure everything is in order and there will be additional IT expenses.”

Deutsche Bank’s Chief Executive Officer Christian Sewing is looking to restore confidence among investors who have seen the bank’s stock lose more than three-quarters of its value over the past four years.

The derivatives positions, some of which don’t expire for as long as thirty years, are tying up capital that could generate hundreds of millions of euros in income each year, Reuters reported last week.

Deutsche Bank announced the creation of its capital release unit in July. It is the bank’s second attempt at hiving off unwanted assets since the 2007-2009 financial crisis.

The unit houses fixed-income assets, including long-dated interest rate derivatives, worth 79 billion euros, Deutsche Bank has said. It also contains 25 billion euros of assets, mostly credit and interest rate derivatives, which Deutsche Bank initially hived off for sale or write-down in 2017.

Some analysts say Deutsche Bank will still be left holding problem assets even if it successfully offloads those placed in the capital restructuring unit.

Only 30 percent of Deutsche Bank’s 24 billion euros of Level 3 assets, which are the most illiquid and hard to value, have been placed within the unit, according to a presentation the bank made alongside its second-quarter results last month.

Deutsche Bank declined to comment on why it chose not to place more Level 3 assets in its ‘bad bank.’