Deutsche Bank's Path to a Game-Changing Merger Got Bumpier

(Bloomberg) -- Finding a merger partner for Deutsche Bank AG was never going to be easy, and now some key power players in German finance are making it even more complicated.

On one side, influential figures in the government favor a tie-up with smaller domestic rival Commerzbank AG to create a national banking champion with the size and scope to accompany German exporters around the world. It’s an enticing project for Chancellor Angela Merkel’s government, which owns 15 percent of Commerzbank and is keen to fortify the country’s financial sector before another downturn hits.

On the other side, key regulators -- including the European Central Bank and German banking watchdog BaFin -- worry about the risks of combining the country’s biggest banks, which are both struggling with weak share prices and low profitability, according to people familiar with the matter. Also, the ECB sees a chance that a cross-border deal involving Germany’s largest lender could spur more integration in Europe’s fragmented financial landscape, the people said.

Stuck somewhere in the middle is Christian Sewing. The Deutsche Bank chief executive officer quietly favors a European merger, but wants time to revive the company’s earnings and share price before considering a deal. The good news is that Deutsche Bank stock has rallied 15 percent since the start of this year after a rocky 2018.

“A merger with any bank would be a mammoth project,” said Philipp Haessler, a Frankfurt-based analyst at Pareto Securities who has a hold recommendation on both Deutsche Bank and Commerzbank. “Deutsche Bank is already busy.”

Deutsche Bank's Path to a Game-Changing Merger Got Bumpier

The differing opinions on a merger show how complex it will be to secure backing from decision makers while also allaying concerns among employees, clients and counterparties that its turnaround is on track. On top of the delicate political maneuvering, there would be the challenge of combining the giant German lender’s operations with those of a domestic or European competitor.

While a deal with Commerzbank might be a quicker solution, it would carry “significant execution risk,” Magdalena Stoklosa, a London-based analyst with Morgan Stanley, wrote in a note Thursday reacting to Bloomberg’s story on how Deutsche Bank regulators view a potential deal. What’s more, Deutsche Bank would need to raise as much as 9 billion euros ($10 billion) to pull off the combination.

Meanwhile, a cross-border merger would require “enhanced clarity” on the Europe Union’s plans for banking union, which “would take a few years to play out,” she wrote.

During strategy meetings in September, Deutsche Bank executives concluded that a merger with Swiss competitor UBS Group AG was the most favorable option among potential European partners, though they determined that the time isn’t right, people familiar with the matter have said.

BaFin’s analysis, which was relayed to Germany’s Finance Ministry, came to a similar conclusion, according to people familiar with the matter. The evaluation and a series of high-level meetings reflect a growing sense of urgency as German decision makers fret that the country’s biggest banks could struggle to weather the next crisis without outside help.

Germany needs big banks that can support its globally active exporters, the Finance Ministry
said in a response to questions from opposition lawmakers that was published Thursday on the Parliament’s website. A healthy German financial industry “requires sufficient revenue strength and business volume to withstand global competition,” the ministry wrote in a statement dated Dec. 28.

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