Germany Intensifies Plans to Fix Deutsche Bank With Merger

(Bloomberg) -- The German government is intensifying efforts to help fix Deutsche Bank AG, with officials studying ways to make it easier to merge with Commerzbank AG, people familiar with the matter said.

The high-level discussions -- which have included Finance Minister Olaf Scholz and Deutsche Bank Chief Executive Officer Christian Sewing-- are looking at concrete ways the government can assist in a potential combination of the country’s two largest lenders, said the people, asking not to be identified discussing the private deliberations. The talks include potentially changing existing laws to make the steps necessary for a merger less costly, they said.

Germany Intensifies Plans to Fix Deutsche Bank With Merger

Nonetheless, talks about a merger are in an exploratory phase and other possibilities such as seeking fresh investment from existing or new shareholders are also still being considered, one person said. The Finance Ministry and Commerzbank declined to comment. Deutsche Bank referred to earlier Sewing comments that the CEO doesn’t plan to make any major strategic moves over the next 18 months.

“The business models of both banks are complementary and it would be good for scale,” said Markus Kienle, deputy CEO at SdK, a German association representing retail shareholders. “But both banks are in trouble. The restructuring costs would lead to years of no dividends and so we think the disadvantages of a merger would currently outweigh its advantages.”

Dwindling Hope

Discussions of a tie up of two banks with large overlapping businesses signal dwindling hope that Deutsche Bank will be able to break out of a vicious circle of declining revenue and sticky expenses. The stock has dropped more than 50 percent this year and broken through multiple record lows on the way down, while funding costs have continued to rise.

Deutsche Bank climbed as much as 6.5 percent to 7.91 euros after the Bloomberg story was published, and traded at 7.85 euros as of 4:52 p.m. in Frankfurt. Commerzbank surged as much as 7.1 percent.

The lender is considering becoming a holding company to make a potential merger easier, people familiar told Bloomberg earlier this year. One obstacle is that it could trigger a significant tax burden because the company might need to revalue assets, the people said. Part of the current talks include possibly tweaking German law to make the creation of a holding structure less disadvantageous from a tax point of view, people said.

Significant Resistance

While nothing has been definitively ruled out, German media speculation that the state may take a stake in Deutsche Bank is seen as a highly unlikely move and one that would meet with significant resistance from lawmakers, people have said.

Scholz has repeatedly said that the country needs strong banks for its export-oriented economy, tacitly signaling his support for tying up the two lenders. The government, Commerzbank’s largest shareholder, backs this approach because that would ensure the country has a strong domestic bank to keep funding German companies even during a financial crisis, with the concern being foreign investors would likely pull out capital at such a time.

Sewing has publicly argued that a merger or any other potentially big strategic move doesn’t make sense for the time being as he focuses on reaching his targets for this year and next. However, he’s also said privately that he will reconsider his planned time line if it becomes clear that he will fail to achieve his goals, a person familiar with his thinking has said.

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