Germany’s two biggest publicly traded banks have both admitted that turnaround efforts for their sputtering operations aren’t going well. Deutsche Bank AG and Commerzbank AG could still try to plod on independently. But a more radical scenario is becoming more likely as concerns mount over the durability of these wounded giants: a government-brokered merger. While that might help the banks weather the next economic slump, it also raises the question of whether combining two weak companies can produce a single strong entity — or, as bankers have been saying, “two turkeys do not an eagle make.”
1. What sort of shape are the banks in?
Not great. They hardly eke out profits. Revenue at Deutsche Bank has declined for the last eight quarters, and not a single analyst tracked by the bank predicts that it will reach its profitability target this year — a goal that Chief Executive Officer Christian Sewing has staked his reputation on. Commerzbank is hardly in better shape. Halfway through a four-year turnaround plan, Chief Executive Officer Martin Zielke in February cast overboard most of the plan’s financial targets. Both banks saw their share prices collapse by more than half last year. There’s been a bit of a rebound since the beginning of 2019, thanks to the merger speculation. Deutsche Bank’s cost of money — the lifeblood of any bank — is substantially higher than its competition.
2. How likely is a merger?
A lot more likely than even a few weeks ago. Sewing and Zielke have begun informal talks, a person familiar the matter has said. German securities laws may make a formal disclosure of any discussions necessary. The banks’ supervisory boards will each meet separately during the week of March 18. Sewing had previously ruled out any deal before the end of the year, hoping that by then a merger with a big bank outside Germany might become feasible. However, his resistance has been crumbling and now he is said to accept that the government’s backing for the deal has created a window of opportunity.
3. What’s the rationale for the merger?
Size and savings. Germany’s banking market is notoriously fragmented and a merger of Deutsche Bank and Commerzbank would boost their combined market share, especially in retail and corporate banking. Then there are the cost savings, through job cuts, branch closings and the pooling of investments in information technology. A merger would make Commerzbank’s retail deposits available to Deutsche Bank, providing a source of cheap funding.
4. What wouldn’t a merger do?
It’s not clear how it would address some of the banks’ deepest problems, like the crowded state of Germany’s domestic banking market and the slow-growing European economy. Deutsche Bank’s securities trading unit has long been an eyesore and adding Commerzbank, which has largely pulled out of trading, wouldn’t change that. And though heavy cost cuts may fix the profitability conundrum, they won’t necessarily restore growth in revenue for the two shrinking lenders.
5. Who’s pushing for it?
The German government, eager to support a “national champion,” is a driving force for quick action, according to people briefed on the situation. Finance Minister Olaf Scholz has said repeatedly that he wants strong banks to support Germany’s export-oriented companies, and the finance ministry, led by Scholz and deputy Joerg Kukies, wants to ensure a stable solution for the country’s two most important export lenders. The government is concerned about a potential economic slowdown that could further weaken the banks and make them more vulnerable to a foreign takeover. Another voice in favor of a merger is the private equity firm Cerberus Capital Management LP, which owns large stakes in both banks and is consulting for Deutsche Bank.
6. Who’s against it?
A key obstacle to a deal is Deutsche Bank’s depressed share price, with investors concerned a tie-up would dilute the value of their stock and potentially trigger a capital increase, people briefed on the matter have said. But they’ve also said that they would first take a look at the specific terms before making a decision. Labor representatives have voiced reservations too, and they have a powerful say, as they fill half the seats on the banks’ supervisory boards. Two of them have come out against the merger, which could lead to the elimination of as many as 30,000 jobs, according to people close to the talks — almost 40 percent of the banks’ combined workforce in Germany.
7. Can those hurdles be overcome?
Maybe. In previous strategic overhauls at the banks, unions have agreed to the plans after extracting concessions. But financial regulators are also wary. They’d want to see a viable business model and sufficient capitalization to give a nod, people familiar with the matter have said. All the skeptics point to backbreaking implementation. Deutsche Bank has a notoriously bad track record in systems integration, putting a question mark over any cost savings a deal would achieve. On the other hand, the current alternatives — two fraying turnaround plans — are at least equally unappetizing. For Sewing and Zielke, there’s just little in the way of another Plan B.
–With assistance from Donald Moore and Zoe Schneeweiss.
To contact the reporters on this story: Steven Arons in Frankfurt at [email protected];Nicholas Comfort in Frankfurt at [email protected]
To contact the editors responsible for this story: Dale Crofts at [email protected], John O’Neil, James Hertling
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