Deutsche Bank ‘Merger of Weakquals’ Seems Least Bad Option, Report Says

(Bloomberg) -- Deutsche Bank AG may not have much choice but to agree to a “merger of weakquals” with rival Commerzbank AG given the unappealing alternatives to the deal, U.K. brokerage company Olivetree Financial Ltd said in a report Thursday.

The report, written by Olivetree analyst Harry Harutunian, runs through three scenarios for Deutsche Bank -- muddling through, merging with another European bank, or closing down its equities trading business and possibly even the entire investment bank -- and concludes that all are even less palatable than a domestic deal at this point.

“We suspect neither bank particularly wants a deal, but may not have a choice. In particular we believe the strategic options for Deutsche Bank are limited,” Harutunian says in the report. “Consequently, a merger with Commerzbank may be the least-bad option.”

The two banks, led by Deutsche Bank Chief Executive Officer Christian Sewing and Commerzbank CEO Martin Zielke, announced on Sunday that they’ve opened talks about a potential merger though they also said that a deal will only happen it they think it makes economic sense. Both lenders previously discarded revenue targets for last year and have said that the current year may be challenging too.

In all likelihood, any deal between Deutsche Bank and Commerzbank would be structured as a share swap given Deutsche Bank’s capital strength, which “offers little leeway on capital to be able to offer any cash,” Olivetree said in the report on Thursday. The banks may still “deem it prudent” to raise capital to boost regulatory capital ratios, potentially leading to a capital raising effort targeting about 4-5 billion euros.

Assuming a share swap that offers no premium on either bank’s current share price, the German government would become the largest shareholder in the new entity with a 5.5 percent stake.

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

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