Why Commerzbank and Deutsche Bank Are Limping to the Altar

(Bloomberg) -- Deutsche Bank AG and Commerzbank AG have independently worked at turning around their fortunes -- without much success. Now Germany’s two biggest publicly traded lenders are figuring out if a merger makes sense, but the idea faces strong opposition. While a tie-up might help them withstand the next economic slump, critics doubt it can produce a single strong lender. As bankers have been saying: "two turkeys do not an eagle make."

1. How likely is a merger?

It’s getting closer. The banks confirmed on March 17 that they had agreed to begin formal merger talks, a move that came after the government signaled it wouldn’t stand in the way of necessary job cuts and cost reductions. Deutsche Bank Chief Executive Officer Christian Sewing had previously ruled out any deal before the end of the year, with people familiar saying he hoped that by then a merger with a big bank outside Germany might become feasible. A formal decision on whether to proceed with talks is due before the end of April, but opposition is mounting.

2. What’s the rationale for the deal?

Size and savings. Germany’s banking market is notoriously fragmented and a merger of Deutsche Bank and Commerzbank would boost their combined market share, especially in retail and corporate banking. Then there are the cost savings, through reduced head count, branch closings and the pooling of investments in information technology. A merger would make Commerzbank’s retail deposits available to Deutsche Bank, providing a source of cheap funding.

3. Who’s pushing for it?

The German government, eager to support a “national champion,” is a driving force for quick action. Finance Minister Olaf Scholz has said repeatedly that he wants strong banks to support Germany’s export-oriented companies, and the finance ministry, led by Scholz and deputy Joerg Kukies, wants to ensure a stable solution for the country’s two most important export lenders. Another voice in favor of a deal is the private equity firm Cerberus Capital Management LP, which owns large stakes in both banks and is consulting for Deutsche Bank.

4. Who’s against it?

Investors have expressed concern in the past that a tie-up would dilute the value of their stock and potentially trigger a capital increase. A key doubter are two Qatari investment vehicles which between them own more than 6 percent of Deutsche Bank. Asset management firm BlackRock Inc., another key shareholder, has also expressed skepticism. The banks’ labor representatives have come out even more strongly against the deal, which could lead to as many as 30,000 job losses, and they have a powerful say as they fill half the seats on the banks’ supervisory boards.

5. What sort of shape are the banks in now?

Not great. They hardly eke out profits. Revenue at Deutsche Bank has declined for the last eight quarters, and not a single analyst tracked by the bank predicts that it will reach its profitability target this year — a goal that Sewing has staked his reputation on. Commerzbank is hardly in better shape. Halfway through a four-year turnaround plan, CEO Martin Zielke in February cast overboard most of the plan’s financial targets. Both banks saw their share prices plunge by more than half last year.

6. What wouldn’t a merger do?

It’s not clear how it would address some of the banks’ deepest problems, like the slow-growing European economy. Deutsche Bank’s securities trading unit has long been an sore spot and adding Commerzbank, which has largely pulled out of trading, wouldn’t change that. And though heavy cost cuts may fix the profitability conundrum, they won’t necessarily restore growth in revenue for the two shrinking lenders. Critics of the deal also warn that it may prove difficult to achieve targeted synergies under Germany’s tough labor laws while integrating the banks’ information technology could run into unforeseen obstacles -- as Deutsche Bank has previously learned the hard way.

7. What if a merger doesn’t happen?

The lack of a compelling answer to this question is why the talks are happening in the first place. A merger would probably be the “least-bad” option for Deutsche Bank, an analyst wrote recently as other ideas such as merging with another European bank are even less realistic. Still, there is a chance that a failure would put pressure on both CEOs to present new solutions. For Deutsche Bank, that would likely mean further cuts to the investment bank, which several influential shareholders have called for behind closed doors for a long time. It would also open the door for foreign banks to bid for either lender. Italy’s UniCredit SpA is among banks to have previously had expressed interest in Commerzbank, according to people familiar.

The Reference Shelf

• Bloomberg Opinion’s Elisa Martinuzzi lays out three questions Deutsche Bank needs to answer and writes in Businessweek about the grim outlook for European banks.
• History suggests a merger with Commerzbank might be a recipe for more trouble.
• At Davos, top finance executives again dreamed about bank mergers.
• A profile of the Deutsche Bank CEO from Bloomberg Businessweek.
• U.S. Federal Deposit Insurance Corp.’s 2017 global capital index showed Deutsche Bank as the most leveraged of the world’s 30 largest systemically important banks.
• QuickTakes on Deutsche Bank’s whirlpool of woes and why the news on Europe’s banks never seems to be good.
• A look back at the history of both banks.

To contact the reporters on this story: Steven Arons in Frankfurt at sarons@bloomberg.net;Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Andy Reinhardt, Ross Larsen

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