Nobody likes Deutsche Bank and Commerzbank’s planned merger. The alternatives look more palatable.
It’s hard to find anyone who is, at least publicly, in favor of Deutsche Bank AG’s merger with Commerzbank AG.
Even one adviser on the deal privately acknowledged what most observers suspect: putting together the two ailing German banks will only create a bigger lender with exactly the same problems. That’s not exactly an endorsement of what would be Europe’s fourth-biggest bank.
But other options exist, and now is the moment to look at them. Deutsche Bank Chief Executive Officer Christian Sewing had begged for more time to trim the company before contemplating a deal. With public opinion heavily skewed against a merger, now would be the moment to ditch an idea nobody likes and present a bolder vision for how to turn around Deutsche Bank – even if that means waving goodbye to some global ambitions.
For Commerzbank too, the future looks brighter without Deutsche Bank. The chances of a foreign buyer knocking on the door are looking greater. On Thursday, the Financial Times reported that Italy’s UniCredit SPA is ready to make an offer if the Deutsche deal is abandoned. It’s a combination that probably makes more sense strategically. Expect other potential suitors to emerge.
Egged on by a handful of politicians with ambitions to create a national champion, the two German lenders have been persuaded to discuss a tie-up. There are good reasons to doubt that the numbers behind a deal will work on paper, let alone in practice.
Asset writedowns and the larger buffers against losses that a bigger institution would need would almost certainly lead to a capital shortfall. It’s unclear how willing investors would be to plug that gap with new equity. Deutsche Bank has already tapped shareholders for about 30 billion euros ($34 billion) since 2010.
Then there are the cost synergies, a key driver for the deal. Cutting expenses in German consumer and corporate banking activities, where the two overlap the most, will require as many as 30,000 jobs to go. That would create an execution risk that many fear is just too great.
And while a combination would give the company a 15 percent share of the market, it would do little to address the pressure from public-sector savings banks and cooperatives that has all but wiped out the profitability of consumer banking.
As one shareholder puts it, missing from the discussion is any sense of what problem the deal is trying to solve.
But a UniCredit tie-up with Commerzbank would tick more boxes. It would create a more diversified group spread across Italy and Germany, that would better serve both countries’ export-oriented small and medium-sized companies, the backbone of their respective economies. That’s something customers should welcome, even if it would add to pressure on Deutsche Bank.
There would be the opportunity to cut costs in the German consumer banking business, where a division of UniCredit already operates some branches.
What’s less clear is whether the regulatory obstacles that make cross-border consolidation in Europe unpalatable would work against the deal. Lenders can’t make the most of expanding outside their home markets because they can’t move funds around freely. That may explain the convoluted structure of the UniCredit deal outlined by the FT, where the Italian bank would merge its German operations with those of Commerzbank, and keep the latter’s listing. That might also make the transaction more appealing to Commerzbank’s shareholders, among them the government, because they are unlikely to be willing to take on UniCredit own pile of Italian government bonds.
Giving up on a potential merger after you’ve signaled to the world that together you would be stronger will take some explaining. All the more so if several attempts to restore profitability have failed, eroding stakeholder confidence. That’s especially true of Deutsche Bank, which has the lowliest valuation among Europe’s top 47 lenders.
Still, Sewing’s efforts to cut costs are starting to pay off. In his first year in the job, he has reduced expenses faster than his predecessor. But he’ll need to do more than trim around the edges. A more ambitious plan to scale back in the U.S. would get him there. If Deutsche Bank intends to be a universal bank serving European companies globally, it should get out of activities that don’t fulfill that purpose.
Abandoning plans to form a national champion and retrenching to focus on core clients might not give either bank’s stock price an immediate fillip. But it would better in the long run than limping toward a merger that fails to address the principal weaknesses of both German and European banking.