London/Frankfurt: Deutsche Bank AG and Commerzbank AG are poised to formally announce the start of exploratory merger talks after the German government signaled it will allow job and cost cuts, according to people familiar with the matter.
The boards of both companies are planning to meet separately on Sunday to approve the beginning of discussions and an announcement could be made shortly after, the people said, asking not to be identified because the discussions are private. The banks have not made a final decision on entering negotiations and any talks may not lead to an agreed deal, the people said.
The start of formal talks would take the German banks a step closer to a historic deal creating Europe’s fourth-largest lender by assets and help fend off potentially hostile suitors. It would cap months of deal speculation and behind-the-scenes discussions with the government about the best ways to stabilize Germany’s largest listed lenders, which have struggled to restore revenue growth after deep cuts to their investment banking units and are now encountering an economic slowdown.
Deutsche Bank and Commerzbank declined to comment. The German finance ministry also declined to comment.
The Finance Ministry is favoring a deal to ensure the country has a lender with global reach to support the export-driven economy, people familiar with the matter have said. The country still owns a large stake in Commerzbank after a bailout.
The two companies previously discussed a merger in the summer of 2016. Both Commerzbank chief executive officer Martin Zielke and Deutsche Bank CEO Christian Sewing were part of those discussions, though Sewing was head of the retail division at the time. The talks fell apart and the lenders embarked on their respective restructurings.
Almost three years later, their turnaround plans are sputtering. Commerzbank has dropped most of its 2020 financial targets after cutting its revenue outlook. Within Deutsche Bank, doubts are growing that it will be able to reach its goals. Sewing, tapped a year ago as CEO with a mandate to accelerate restructuring efforts, has recently given up his resistance to pursuing bolder steps, people familiar with the matter have said.
The two banks had recently intensified informal discussions, they said. Deutsche Bank was also exploring other strategic options, and was planning to implement more cost reductions to ensure it can reach its profitability target, according to the people.
Deutsche Bank in February reaffirmed its 2019 profitability target but also made clear that it would need to implement tougher measures if markets don’t play along and revenue continues to decline. January was a terrible month for the trading business though February has seen improving conditions, the people have said.
For Deutsche Bank, the urgency to address the situation is exacerbated by high funding costs and the risk of a credit rating cut. Chairman Paul Achleitner is said to see an expansion of Deutsche Bank’s retail deposit base -- which Commerzbank would bring -- as one way to lower funding costs.
The recent decision by the European Central Bank to push out the expected first interest rate increase has exacerbated the situation as both banks have said that they will struggle to meet their long-term profitability target in the current low interest rate environment.
The idea back during the banks’ talks in 2016 was to merge Commerzbank with a subsidiary of Deutsche Bank that would also contain its retail and some of its corporate banking operations, and then float that business on a stock exchange, a person involved in the talk has said. Deutsche Bank’s trading operations would have remained separate, perhaps with a view to selling or merging them with another bank at some point.
Proponents of a deal have said it will help the firms cut cost by eliminating branches and thousands of jobs, while pooling investment in information technology. They also point to the increased deposit base, which could help reduce funding costs for Deutsche Bank’s struggling securities unit.
Critics have said a merger would lock both companies into several more years of restructuring, with high execution risks, and doesn’t fix the real problems at Deutsche Bank’s securities unit. Several influential Deutsche Bank investors have said they’re wary of a merger as it will dilute their stakes at a low valuation. Both lenders lost more than half of their stock market value last year alone, and are down more than 90% from their peaks.