Deutsche Bank Could Lose $1.7 Billion in Revenue If Deal Happens
(Bloomberg) -- Deutsche Bank AG estimates it could lose the equivalent of almost a fifth of Commerzbank AG’s annual revenue should it go ahead with a takeover of the lender, another potential sticking point for a deal that’s run into hurdles of late.
Customers seeking to reduce their exposure to the combined lender could pull business worth 1 billion euros to 1.5 billion euros ($1.1 billion to $1.7 billion), people familiar with the matter said. The estimate is a key factor in deciding whether a deal makes sense, the people said, asking not to be identified in discussing internal deliberations.
The chief executive officers of both banks have emphasized that the outcome of their talks is open and they would only go ahead if the numbers work out. The loss of business and expected restructuring costs would have to be offset over time by cost savings, currently estimated at about 40 percent of Commerzbank’s cost base, or 2.7 billion euros, the people said. A representative for Deutsche Bank declined to comment.
The potential revenue attrition adds to a growing list of headaches as Deutsche Bank CEO Christian Sewing and his counterpart at Commerzbank, Martin Zielke, enter a fifth week of negotiations. Labor representatives seeking to prevent thousands of job cuts are trying to stop the talks. Regulators are casting a skeptical eye and lawmakers across the spectrum have distanced themselves from efforts by the Finance Ministry to broker a deal.
The biggest client overlap -- and therefore the highest risk of revenue loss -- is with the German medium-sized businesses known as Mittelstand, JPMorgan Chase & Co. analysts led by Kian Abouhossein wrote in a note in February. Commerzbank’s revenue in the segment, at the heart of its business model, could decline 20 percent after a deal, they wrote. Business with large companies and financial institutions could drop by 15 percent each, they said.
What We Know About Deutsche Bank’s Commerzbank Talks a Month On
Deutsche Bank shares rose 0.4 percent in Frankfurt and Commerzbank gained 1.3 percent.
The focus of the talks is increasingly shifting to the future of Deutsche Bank’s investment banking unit, one person said. Commerzbank has been assessing its rival’s willingness to restructure the business and financial watchdogs are seeking clarity just how much a combined bank would rely on the securities unit, people familiar with the matter have said.
Sewing last year highlighted transaction banking as well as some areas in fixed-income trading as businesses within the investment bank that he wants to expand. He also cut prime finance, U.S. rates and corporate finance in the U.S. and Asia.
The division has long been a source of concern in view of its low profitability and the many legal issues it has caused for the lender in the past. It shed 8 percent of its workforce last year and 12 percent of its assets. Several large investors have long been asking for deeper cuts to the investment bank, in particular the U.S. unit, people familiar with the matter have said.
Yet much of the savings in a deal would probably come from eliminating overlapping jobs and branches, particularly in the banks’ home market. As many as 30,000 positions are said to be at risk in a takeover, prompting fierce opposition from labor representatives at the two companies.
In total, Deutsche Bank estimates it can shave about 40 percent off Commerzbank’s annual cost base, people familiar said previously. Such savings would entail about 4 billion euros in one-time restructuring expenses, the people said.
Another key question in the talks is just how much capital, if any, the banks need to raise. A takeover would trigger a revaluation of some of Commerzbank’s assets, which it has on its books at about 2.4 billion euros more than their current market value. The amount would probably be tempered by a tax effect, with one person saying previously that the net gap would fall to about 1.5 billion euros.
Part of the banks’ capital needs could conceivably be covered through an accounting quirk known as badwill. 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.
The bank’s regulators have repeatedly said a combined bank will need to show it has a viable business model that also demonstrates the company is sufficiently capitalized. A deal would mark the biggest test to date for the European Central Bank’s supervisory arm since it started overseeing lenders less than five years ago. Officials are concerned that the ECB’s credibility will suffer a major blow if they approve a deal and the merged bank then runs into trouble, they said.
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