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Commerzbank Enters Key Weekend in Deutsche Bank Talks

Commerzbank Enters Key Weekend in Deutsche Bank Talks

(Bloomberg) -- Commerzbank AG is nearing a decision as early as this weekend on whether to deepen merger talks with Deutsche Bank AG or break them off, people briefed on the matter said.

The two banks are leaning toward intensifying talks and are close to a consensus on the rough outlines of a potential deal, the people said, asking not to be identified in disclosing internal discussions. Deutsche Bank Chairman Paul Achleitner previously promised an update by April 26. No decision has been reached and the talks could still fail.

The banks declined to comment on the status of the discussions. Sueddeutsche Zeitung reported earlier that a preliminary decision could come over the weekend.

Since Deutsche Bank and Commerzbank, led by Christian Sewing and Martin Zielke respectively, entered into formal merger negotiations last month, they have been in daily contact, the people said. Zielke in particular has been pushing for a quick decision, one person said. Commerzbank’s biggest shareholder is the German government, and the Finance Ministry, which oversees the stake, has encouraged a deal.

Yet opposition has been increasing across the political spectrum. Lawmakers from Chancellor Angela Merkel’s Christian Democratic-led bloc to the anti-capitalist Left party and far-right AfD are laying into the plans. With Social Democratic colleagues of Scholz also questioning the deal, he looks increasingly isolated.

Commerzbank Enters Key Weekend in Deutsche Bank Talks

The people at Deutsche Bank working on the deal estimate it could lead to savings in excess of 40 percent of Commerzbank’s cost base, one person said. It could make 30,000 jobs redundant, other people have said previously. That’s more than a fifth of the two banks’ combined workforce.

A deal could also create an estimated capital need of close to 10 billion euros, including some 4 to 5 billion euros for restructuring costs, one person said. Some of that may be covered by existing provisions as both banks have set aside money for their ongoing turnaround efforts, said another person. Capital may also be needed to cover asset writedowns and strengthen buffers, they said. Commerzbank has large holdings of Italian bonds that would have to be revalued in a takeover.

The difference between the book value and the estimated market value of the assets and liabilities on Commerzbank’s balance sheet at year end 2018 suggests a potential writedown of 2.4 billion euros. That would be mitigated by a tax effect, pushing the effective writedown to about 1.6 billion euros, one person said. Most of that would be on the bank’s portfolio of Italian bonds, according to this person.

A breakdown of the talks could reignite interest among foreign rivals. Banks including BNP Paribas SA and UniCredit SpA have reached out in the past to the German government about Commerzbank, people familiar with the matter have previously said.

Shares of Commerzbank rose as much as 3.9 percent Thursday after the Financial Times reported that UniCredit is preparing a takeover bid should the talks with Deutsche Bank fall through. Deutsche Bank and UniCredit fell.

One question in a tie-up with Deutsche Bank is just how much of that capital can be covered through an accounting quirk. Commerzbank’s shares are trading well below the value of the bank’s tangible equity, and regulators could decide to recognize some of that difference -- currently about 15 billion euros -- as fresh capital in a takeover. That would mitigate the need for additional measures.

Raising additional capital could prove challenging for Deutsche Bank. Some key shareholders oppose the idea of a share sale because it would further dilute their stakes at a low valuation, people familiar with the matter have said. A sale of Deutsche Bank’s asset management unit DWS Group could help raise capital, but the bank is reluctant to give up a source of stable revenue and profits.

Allianz SE, the Munich-based insurer that owns Pacific Investment Management Co. and Allianz Global Investors, is exploring the possibility of combining DWS with its asset management arm, Bloomberg reported last month. UBS Group AG has also considered seeking to buy DWS as the Swiss bank explores strategic options for its asset management arm, people familiar with the matter have said.

--With assistance from Sonia Sirletti, Birgit Jennen and Patrick Donahue.

To contact the reporter on this story: Steven Arons in Frankfurt at sarons@bloomberg.net

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Christian Baumgaertel, Andrew Blackman

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