A logo sits illuminated above the entrance of a Deutsche Bank AG bank branch in Frankfurt, Germany. (Photographer: Krisztian Bocsi/Bloomberg)

Deutsche Bank Deal Talk Is Revived With Cerberus in Picture

(Bloomberg) -- A year ago, executives at Deutsche Bank AG and Commerzbank AG held talks about a potential combination, only to abandon them shortly after to try and go it alone. Now investors are asking if a U.S. buyout firm could make Germany’s largest banks change their minds.

The shares of both lenders extended gains Thursday, a day after billionaire Stephen Feinberg’s Cerberus Capital Management disclosed owning 3 percent in Deutsche Bank. The new stake, first reported by Bloomberg, comes just months after Cerberus took a slightly bigger stake in Commerzbank and makes the U.S. firm a top shareholder of both banks.

Deutsche Bank Deal Talk Is Revived With Cerberus in Picture

While Feinberg’s firm probably wouldn’t be able to force a deal on its own, it’s entering the fray at a time when both lenders struggle to revive revenue growth after scaling back risk in their investment banks and focusing more on their home market. Banks in Italy and France have reached out to the German government, the biggest shareholder in Commerzbank after bailing it out in 2009, to signal interest.

Deutsche Bank investors, meanwhile, are stepping up pressure on Chief Executive Officer John Cryan to return the company to growth. The CEO, speaking at a conference in London Wednesday, said he wouldn’t be surprised to see a consolidation in Germany’s banking market next year, once a new government is in place.

“This will probably fuel speculation around a merger between the two banks,” said Michael Huenseler, a fund manager at Assenagon, an asset manager with a small stake in Deutsche Bank. “It’s unlikely that Cerberus’s rationale for its investments in Deutsche Bank and Commerzbank is based purely on the expectation that they can be turned around.”

Shares Rise

Deutsche Bank rose 1.4 percent at 9:05 a.m. in Frankfurt trading and Commerzbank added 0.7 percent.

Some analysts and investors said they don’t expect the two lenders to engage in all-out merger talks any time soon, given that they’re still in the middle of their separate turnaround plans. But they could examine potential cooperations to save money, for instance in information technology, said Klaus Nieding, vice president at shareholder protection group DSW.

“I don’t think this is the beginning of concrete merger talks,” he said on Bloomberg TV. “It seems clear to me that Cerberus here is betting on the future more” than immediate deals.

Putting aside a full merger, there are plenty of areas where the banks could benefit from deals of some sort. One rationale for the exploratory merger talks last year was a possible combination of the two lenders’ large retail operations, a person familiar said at the time. Shortly after the talks broke down, Commerzbank CEO Martin Zielke, a retail banker by training, unveiled a new strategy that included a push to add 2 million net new clients by 2020. While the bank is ahead of target, it has struggled to turn that into new income.

‘Great Proliferation’

At Deutsche Bank, Cryan had initially sought to sell a big chunk of the lender’s retail business, but changed course in March after he failed to find a buyer for his Postbank consumer banking unit. Now he’s trying again to integrate it, an effort that previously failed amid budget overruns, resistance by staff, and after regulators constrained the use of Postbank deposits for other businesses.

Size is important in Germany, because the retail market is fragmented and dominated by a dense network of local and regional savings banks. The five largest banks comprise less than 30 percent of Germany’s banking assets, according to data from the European Central Bank for 2015. In the U.K., it’s close to 40 percent and in France, near 50 percent.

“There’s a great proliferation of banks in Germany,” with a lot of them being very small, Cryan said Wednesday at a conference. “I think the dynamic is changing and I do think there will be a round of consolidation and I guess that might even start happening next year.”

Both lenders have cut back their investment banking operations to align them more with clients and reduce volatile trading. Commerzbank is also planning to sell a unit that includes exchange-traded products, while Deutsche Bank wants to float a minority stake in its asset management business to raise capital.

‘Highly Attractive’

Investment bankers who have looked at a potential takeover of Commerzbank say most rivals would be interested in its corporate bank, where it caters to the mid-sized companies that are the backbone of the German economy, Europe’s largest. There is little overlap with Deutsche Bank, which tends to focus on larger corporate clients.

While both banks have struggled with ultra-low interest rates, they central role in Europe’s largest economy and the prospect of rising interest rates has attracted investors this year. Deutsche Bank shares gained 2.4 percent in 2017 through Wednesday, despite the dilution from its capital increase, and Commerzbank is up 64 percent, the second-best performer among the 44 members in the Bloomberg Europe 500 Banks and Financial Services Index.

“We have a constructive view of European fundamentals and believe Germany is a highly attractive place to invest, in particular,” said a spokesman for Cerberus. “Within Germany, we believe there are attractive long-term opportunities in retail and corporate banking due to Germany’s robust economy, high savings rate, and a number of other factors.”

Cerberus is a private investment firm with over $30 billion under management, according to its website. The firm invests across distressed securities and assets, private equity and real estate and also provides financing to middle market companies.

‘This Is Revolutionary’

Shareholders led by Cerberus last month listed Bawag Group AG, Austria’s fourth-biggest bank, on Vienna’s stock exchange, making it the country’s largest ever IPO. The stock has lost about 10 percent since then. The lender, where Cerberus remains the biggest shareholder, has earmarked about 1 billion euros of excess capital for potential deals over the next three years. CEO Anas Abuzaakouk has highlighted opportunities in Germany, though it’s targeting smaller lenders with total assets of up to 10 billion euros.

Under Cerberus’s ownership, Bawag agreed to buy Suedwestbank AG, a small commercial lender in Germany’s prosperous southwest. Cerberus is also a bidder for HSH Nordbank, a troubled bank in the north that has been controlled by regional governments since the financial crisis, people familiar on the matter said previously.

The U.S. firm is the No. 4 shareholder in Deutsche Bank. It’s the second-largest investor in Commerzbank, after the German government. Deutsche Bank’s other top investors include China’s HNA Group, which became the largest shareholder after the April capital raising, with about 9.9 percent of the stock. The Qatari royal family and BlackRock Inc., the world’s largest asset manager, are also among the top five.

“This is revolutionary for Deutsche Bank,” said Ingo Speich, a fund manager at Union Investment, an asset manager that owns about 0.15 percent in the bank. It’s “a clear change in Deutsche Bank’s shareholder structure because it adds a private equity firm.”

©2017 Bloomberg L.P.