After months of informal talks and weeks of increasingly fevered speculation, Deutsche Bank AG Chief Executive Officer Christian Sewing finally got the green light he needed to proceed with negotiations on a tie-up with crosstown rival Commerzbank AG.
Finance Minister Olaf Scholz agreed not to oppose the tens of thousands of job cuts needed to make a deal between Germany’s two biggest publicly traded banks work, Sewing was told, according to people familiar with the matter. In the preceding days, employee representatives at both lenders announced their opposition to a merger that risks eliminating as many 30,000 positions -- more than one out of five of the combined workforce. That’s when Sewing sought assurances that the government had his back.
While Scholz and his deputy Joerg Kukies have pushed for a combination of the two weakened banks to ensure Europe’s biggest economy had a more durable lender, the ministry issued only a brief statement after the banks’ simultaneous announcements on Sunday afternoon. The Finance Ministry “notes" their decision and that it’s in “regular contact" with all parties involved.
Deep job cuts for some while investment bankers get bonuses could also strain the optics for politicians. Analysts at Bank of America Corp. wrote in a note that it’s an open question whether Deutsche Bank would be able to maintain the pay and incentive structure of a global investment bank if it were to merge with Commerzbank.
There are still plenty of hurdles to clear. Talks are now focused on how much capital a deal would require and where that should come from. On the one hand, Commerzbank would probably have to take a hefty charge on its holdings of Italian government bonds, which it now values at a premium to the market price. On the other hand, Commerzbank’s market value is way below the value of its assets, so Deutsche Bank may be able to add the difference to its capital base.
Still, shares of both lenders rose Monday, with Deutsche Bank gaining 4.1 percent at 9:42 a.m. in Frankfurt trading and Commerzbank adding 5.9 percent.
Selling the deal to the European Central Bank and other banking watchdogs may be more difficult. Senior regulatory officials say their focus is on the banks’ ability to deliver on the difficult integration and promised cost savings.
Annual expenses could eventually be reduced by more than 2.2 billion euros ($2.5 billion), according to the average of four analyst estimates compiled by Bloomberg. That’s still just a small fraction of their overall costs. Plus, there’s concern that simply adding Commerzbank’s revenue to Deutsche Bank isn’t enough to address malaise at its investment bank, the primary source of earnings.
'Combined synergies will need to exceed 3 billion euros annually, we think, but given stringent labor laws, strong unions and slow adoption of mobile banking, delivery will take time,' according to Bloomberg Intelligence analyst Philip Richards.
Then there are the banks’ own unhappy history with mergers. Deutsche Bank has struggled to integrate Postbank, which it bought for about 6.5 billion euros in 2010. Commerzbank swallowed a troubled Dresdner Bank in 2008, which worsened its losses from the global banking crisis and required two government bailouts.
A potential combination became increasingly hard to ignore after a dismal fourth quarter for Deutsche Bank when revenue plunged, its borrowing costs surged and German authorities raided its headquarters. But what was really worrying to insiders was just how jumpy investors and clients had become, raising the prospect that the bank’s franchise would be lastingly eroded.
A tie-up of the two 149-year-old firms would create Europe’s fourth-largest lender, with assets of about 1.81 trillion euros. The banks have a combined market value of about 25 billion euros -- less than half the level of BNP Paribas SA -- following the long slide in the shares. Both companies have lost more than 90 percent of their value from their peaks.
While it’s not clear how a merger would be structured, Deutsche Bank is the larger of the two and would probably be the acquirer. If a deal goes ahead, it may need to raise about 8 billion euros from shareholders or through sales of holdings such as its DWS Group asset management business, according to an estimate by Christian Koch, a DZ Bank analyst.
Allianz SE has shown interest in DWS and is exploring the possibility of combining it with its own asset management arm, according to people familiar with the matter.
Sewing, in the job for just 11 months, had preferred a deal with a European peer but only after at least 18 months while he got the house in order. The deteriorating outlook forced a change in his approach.
The question then was how quickly he and Commerzbank CEO Martin Zielke could move and sell the deal to their many stakeholders. The top leadership of the two banks met earlier this year to discuss a possible tie-up and also delicately broached the idea with senior financial regulators, said people familiar with the matter. They trod a fine line to hold tentative talks while not violating German securities law that would require serious talks to be publicly disclosed.
After years of rebuffing foreign suitors for Commerzbank, the German government was also encouraging a deal. That’s crucial, since the state still owns a 15 percent stake in the bank following a 10 billion-euro bailout in 2009. Scholz spoke openly of the need for national banking champions and named a former Goldman Sachs banker as a deputy.
The timing could hardly be better for pitching a merger between the banks to politicians. Sewing would have been blamed for wasting a historic opportunity if he didn’t at least consider a merger between the two banks.
Deutsche Bank and Commerzbank issued brief public statements on Sunday to confirm the talks. Deutsche Bank cited 'arising opportunities' as the reason for exploring a merger, while cautioning that 'there is no certainty that any transaction will occur.'
This story has been published from a wire agency feed without modifications to the text.