Deutsche Bank and Commerzbank call off merger talks
AFTER SIX weeks of rumour, a progress report was due. Deutsche Bank, Germany’s biggest bank, had promised investors an update on merger discussions with its Frankfurt neighbour, Commerzbank, on April 26th, alongside its first-quarter earnings. The update came, unplanned, a day early. On April 25th the two banks said they had called off the talks, the announcement prompted by a Reuters report that negotiations were about to fail.
The pair said that a deal would not justify the “additional execution risks, restructuring costs and capital requirements associated with such a large-scale integration”. Outside the two banks and the German government, Commerzbank’s biggest shareholder with a 15% stake, plenty had reached that conclusion even before the banks said in mid-March that talks were under way and embarked on weeks of negotiation. Two troubled lenders looked unlikely to make one strong one. Deutsche eked out only a tiny profit in 2018, its first for four years, while Commerzbank has made paltry returns. Deutsche’s shares have been trading at about 25% of book value, Commerzbank’s at little more.
Though Commerzbank has done a lot of reconstructive work since taking over Dresdner Bank during the global financial crisis, Deutsche still resembles a building site. It is still attempting to integrate Postbank, a retail business it bought in 2008-10, tried to sell and then decided to keep. It has retreated in investment banking, especially trading, to focus on corporate clients, who it still believes need a strong European alternative to Wall Street firms. Even a combined entity, after deep cuts in costs, would have found it difficult to build profitability in an overcrowded domestic market in which the co-operative and public sectors are also strong competitors.
So what was the logic of a merger? There was some, if never enough. It would have created Germany’s biggest retail bank by some distance, with about a fifth of deposits in a highly fragmented market. It might have forced a faster digitisation of German retail banking, including branch closures—loudly opposed by trade unions at both banks while the talks were under way. Commerzbank’s deposit base would have brought Deutsche cheaper and more stable funding. It would have tilted Deutsche faster towards serving companies—notably by bringing more business from Germany’s Mittelstand, the backbone of both Commerzbank’s revenues and the national economy. Given Europe’s lack of banks with the clout of America’s giants, domestic consolidation has long been seen as a stepping stone to creating continent-wide players, with economies of scale.
For the government, one attraction of a merger was that Commerzbank would then be sure not to fall into the hands of one of the foreign suitors with which it has been repeatedly linked. Even in the past few weeks, reports have surfaced of interest from Italy’s UniCredit, which already owns HVB, a large Munich-based lender, and from ING, of the Netherlands, which already has a successful branchless retail bank in Germany.
With Deutsche ruled out, such rumours are unlikely to go away. Ironically, the failed talks may, through a bid for Commerzbank, hasten a cross-border deal. Deutsche’s situation is as dismal as ever. In a preview of its first-quarter earnings with the announcement that talks had failed, it said it had made only a puny €200m ($ 227m) or so in net profit, with corporate and investment-banking revenues down on a year earlier. Put away the drawing board, and get back to the building site.