Don't Write Off Germany's Big Bank Merger Just Yet

(Bloomberg Opinion) -- At first glance, the difficult and risky plan to merge Deutsche Bank AG and Commerzbank AG has more foes than fans, and faces mortal threats.

In recent days, labor representatives on Commerzbank’s board have signaled they are so opposed the deal they will try to remove CEO Martin Zielke. Meanwhile, regulators seem unconvinced by the logic of a deal, almost three weeks after the talks became formal. Investors, too, appear to be lukewarm about the proposal.

But do not overlook the determination of those eager to build a national champion as foreign predators lurk on the sidelines.

As a top shareholder in Commerzbank, Germany’s finance ministry has played a key role in encouraging the discussions as it tries to maintain a national player that won’t dip in and out of the market. 

If the merger were to fail, Italy’s UniCredit SpA is poised to acquire Commerzbank, while France’s BNP Paribas SA has also shown interest in the German lender, according to press reports. The last thing Deutsche Bank needs is a stronger competitor in the most attractive pocket of German banking – providing services to small- and medium-sized companies.

With tens of thousands of jobs on the line in Germany itself, it’s no surprise that battle lines are being drawn. Both banks would have already been braced for a backlash from the employee representatives that make up half of their supervisory boards. Winning them over will be critical to the negotiations.

It will be harder to convince regulators and shareholders of the merits of the combination. 

Bloomberg News has reported on Thursday that the European Central Bank, the firms’ chief regulator, is skeptical that the merger would place the companies on a safer footing. Both banks have been battling anemic profitability and revenue, and each has struggled with their own reorganizations. It’s not obvious that the two companies combined would have much more pricing power in a domestic commercial banking market that is hugely fragmented.

The ECB may not have received a formal plan yet, but it will be poring over the numbers closely. The transaction will be the institution’s biggest test since it began overseeing the region’s largest lenders just over four years ago. It’s a precedent it cannot afford to get wrong and it won’t be rushing to make any decision.

The critical points it will need to gain comfort with include the execution risk and the hit to capital. Restructuring charges and a fresh look at the value of Commerzbank’s assets are expected to mean capital levels will be hit. As a bigger lender, the joint entity may need to bolster those same buffers.

Analysts at Credit Suisse Group AG estimate that unless Deutsche Bank retreats further in investment banking as part of the deal, the combined group would move up a notch among globally systemically important banks, subjecting it to higher capital requirements.

Help here could come from a quirk of accounting: Deutsche Bank may be able to book a gain because it would be paying less for Commerzbank’s assets their reported book value. Determining how much so-called badwill could then count as common equity Tier 1 will another key decision for the ECB.

If shareholders have to contribute more money to make up any shortfall, they will need to be convinced that the expected earnings accretion is achievable to make it worth their while.

Deutsche Bank Chairman Paul Achleitner has said previously his firm plans to provide an update on the talks when it publishes first-quarter results, scheduled for April 26. Making the most of the time between now and then to consider what from the outside seems a questionable deal appears wise.

The most recent big bank mergers in Europe were taxpayer bailouts in the aftermath of the financial crisis, and the biggest financial services merger of all time in 2007 has left the U.K. government nursing losses to this day.  Memories are still painfully fresh.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.

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