We don’t know who called it off, though Commerzbank can’t have been exactly comfortable about hitching itself to a bank with more skeletons in its cupboards than Bluebeard’s castle. Both banks merely said that the proposed merger did not make financial sense. “After careful analysis it became apparent that such a combination would not be in the interests of either bank’s shareholders or other stakeholders,” said Commerzbank’s press release. And in an interview with CNBC, Deutsche Bank’s Chief Financial Officer, James von Moltke, said:
We were looking for a compelling financial case in addition to the strategy of pursuing an in-market merger, and over the course of the last several weeks that case just didn’t emerge…it’s a combination of net synergies, implementation costs, the capital impact, and ultimately return for shareholders, and the business case simply wasn’t there.
If there is one thing that the merger talks have made clear, it is that Commerzbank is now a takeover target. Commerzbank’s shareholders were clearly disappointed by the failure of the merger talks: the share price dropped 2.4%. But there are other potential suitors: the troubled Italian bank Unicredit, the French banking giant BNP Paribas and the Dutch lender ING have all been mentioned.
Unicredit has for some time been interested in acquiring Commerzbank, apparently with a view to merging it with Unicredit’s existing German subsidiary HypoVereinsBank (HVB). A merger between the two banks could generate considerable synergies without major job losses: Commerzbank’s strength in lending to Germany’s important “Mittelstand” of small and medium-size enterprises nicely complements HVB’s strong retail presence, especially in Germany’s prosperous regions of Bavaria and Hamburg. Combined, the two banks would become the largest lender in Germany. The trouble is that this new “national champion” would be, er, Italian. How do you say “schadenfreude” in Italian?
Understandably, German politicians don’t seem too keen on this scheme, and since the German government owns 15% of Commerzbank’s shares, their opinion matters. And a tie-up with BNP Paribas would hit similar problems. But perhaps a merger with ING might be more to their taste?
According to the German monthly Manager Magazin, ING expressed an interest in Commerzbank as long ago as February. Mindful of the German government’s preference for consolidation within the German banking sector, ING is apparently offering to sweeten the deal by moving its headquarters to Frankfurt. This would create the illusion of a merger between two German banks. It would also considerably enlarge the crowded German retail banking sector, in which a certain bank is already struggling to make headway. Sometimes I feel sorry for Deutsche Bank.
Whatever the eventual outcome, it seems that Commerzbank’s days as an independent business are numbered. The only question now is which of the potential bidders will win Commerzbank’s hand – or whether there is another white knight waiting in the wings.
But the future of Deutsche Bank looks even worse. Too big and too toxic for another bank to swallow, it is heading for the breakers’ yard.
First in line for dismemberment is Deutsche Bank’s loss-making investment bank. This has been living on borrowed time – and money – for quite some time. Successive CEOs have resisted closing it, preferring to pretend that with a little surgery and a lot of money it can become once again the major global player that it was before the financial crisis. Shareholders, however, take a dim view of a strategy that amounts to gambling for resurrection. They are agitating for much more drastic measures. On Tuesday April 23, the Wall Street Journal reported that management was contemplating creating an internal “bad bank,” which would contain assets and business lines earmarked for sale or run-off. If shareholders get their way, that could include large parts of the investment bank.
Deutsche Bank’s poorly-performing asset management subsidiary, DWS, is also a prime candidate for sale. Just over a year ago, Deutsche Bank floated DWS, selling 22.5% of the shares for €1.4bn. But since then its performance has been dismal, with investor outflows and falling profit margins. In late 2018, Deutsche Bank replaced DWS’s chief executive, the fifth change since 2012. True to Deutsche Bank form, the new CEO promptly went on a cost-cutting drive. But cost-cutting alone seems unlikely to heal the troubled asset manager. Analysts have speculatedthat selling or closing parts of the business might be a better approach. Or perhaps merging it with another asset manager. Talks are currently proceeding with the giant Swiss bank UBS about a merger between DWS and UBS’s wealth management division. If successful, the merged entity would be jointly owned by Deutsche Bank and UBS. Which of these banking behemoths would have control is yet to be decided.
And it doesn’t end there. Despite Christian Sewing’s comforting words to staff after the failure of the merger talks, Deutsche Bank’s prospects look extremely poor. Closing the investment bank and spinning off DWS would not restore its fortunes. It does not have sufficient market share in the cut-throat German retail banking sector to earn significant profits from retail lending, and it is up against stiff international competition in corporate lending and transaction banking. Sewing’s heads-up on the interim results shows just how difficult it is for Deutsche Bank to make any headway: when the CEO celebrates as a key accomplishment “loan and deposit growth in our Private & Commercial Bank as well as loan growth in the Corporate & Investment Bank”, the bank is on slim pickings indeed.
Low though it is, the target of “over 4% return on tangible equity” appears out of reach, especially as Deutsche Bank is probably facing more hefty fines for its involvement in a series of money laundering scandals. For how much longer will Deutsche Bank shareholders tolerate such poor returns – and its customers such poor conduct?
Initially, Deutsche Bank’s share price rose on the news that the Commerzbank marriage was off; but once investors had thought about the implications, it sank, closing down 1.5%. The marriage wouldn’t have solved Deutsche Bank’s problems, but neither does calling it off. Deutsche Bank is still in deep, deep trouble – and German dreams of creating a “national banking champion” have turned to dust.