Deutsche Bank AG and Commerzbank AG are edging closer to a merger as Germany’s largest listed lenders run out of time to show they can grow as standalone companies.
The banks are intensifying informal talks as their turnaround efforts sputter, according to a person familiar with the matter. While there’s no formal mandate to pursue a merger and other options are still being considered, Deutsche Bank Chief Executive Officer Christian Sewing has given up his resistance to doing a deal this year, according to the person, who asked not to be identified in disclosing internal deliberations.
Deutsche Bank’s management board has approved talks with Commerzbank, the person said.
Less than a year after taking over, Sewing is still struggling to reverse a long slide in revenue amid a slowdown in the economy that’s delaying a return to more normal interest rates. The Finance Ministry favors a merger of both lenders before the situation gets worse to support the small and mid-sized companies that are the backbone of the export economy, people familiar with the matter have said.
Deutsche Bank in February reaffirmed its 2019 profitability target but also made clear that it would need to implement tougher measures if markets don’t play along and revenue continues to decline. January was a terrible month for the trading business though February has seen improving conditions, several people familiar with the matter said.
The bank is now planning to implement tougher cost cuts as one step to ensure it can reach the profitability target, said the people. Other strategic options include a merger with another European bank, though that’s seen as remote. People close to Deutsche Bank’s leadership have floated names like UBS Group AG, BNP Paribas SA and ING Groep NV.
Deutsche Bank rose 1.9 percent at 10:35 a.m. in Frankfurt trading and Commerzbank gained 4.2 percent. The banks and the Finance Ministry declined to comment.
The two companies previously discussed a merger in the summer of 2016 under then-Deutsche Bank CEO John Cryan. Sewing was part of those discussions as head of the retail division at the time. The talks fell apart and the lenders embarked on their respective restructurings.
Almost three years later, those turnaround plans are sputtering. Commerzbank has dropped most of its 2020 financial targets after cutting its revenue outlook. Deutsche Bank, too, has been unable to reverse a long decline in revenue. Both lost more than half of their market value last year.
For Deutsche Bank, the urgency to address the situation is exacerbated by high funding costs and the risk of a credit rating cut. Chairman Paul Achleitner sees an expansion of Deutsche Bank’s retail deposit base — which a Commerzbank deal would bring — as one way to lower funding costs, the people said.
Just a Notch Over Junk
Deutsche Bank’s senior non-preferred rating is close to sub-investment grade.
Two credit rating providers — Moody’s Investors Service and Fitch Ratings — have a negative outlook on the lender and see progress on revenue and profitability as key to maintaining their rating.
Finance Minister Olaf Scholz and Joerg Kukies, a former Goldman Sachs banker who serves as his deputy, have been favoring a merger with Commerzbank, people familiar with the matter have said. While a deal is viewed by some as an imperfect solution, some in the government think it will be impossible for Sewing to turn around Deutsche Bank before an economic slowdown exacerbates the situation, Bloomberg has reported.
The idea back in 2016 was to merge Commerzbank with a subsidiary of Deutsche Bank that would also contain its retail and some of its corporate banking operations, and then float that business on a stock exchange, according to one of the people. Deutsche Bank’s trading operations would have remained separate, perhaps with a view to selling or merging them with another bank at some point.
Deutsche Bank last year laid some groundwork that would make such a split easier, by setting up a largely separated retail and commercial clients operations when it combined its two German retail subsidiaries. The move was aimed at placating regulators’ requirements that the new entity could be separated easily from the rest of Deutsche Bank should it be necessary to wind down the trading operations.
Several of the largest Deutsche Bank shareholders said they would need to see a concrete proposal first before deciding whether they would support it. Two of them said they currently lean toward opposing a merger, while one would back a deal. All spoke on condition of anonymity.
Critics of the Commerzbank option say it would lock Deutsche Bank into several years of restructuring and come with high execution risks, as job cuts are difficult to implement given Germany’s tough labor laws. They also warn that Deutsche Bank’s disappointing track record of technology integration would make it tricky to achieve savings.
Another option under consideration — and currently favored by the two shareholders skeptical of a merger — would see deep cuts to the bank’s U.S. investment banking operations. In this scenario, the bank would redeploy the freed capital in growth areas. That option, however, would erode the bank’s top line even more, at least initially. Sewing has said that the bank will remain in the U.S., with the investment bank a key revenue contributor.
Merger speculation boosts shares in Deutsche, Commerzbank
Shares in Deutsche Bank and Commerzbank traded higher on Monday as German business warmed to the prospect of a tie-up between the country’s two largest banks.
Deutsche Bank shares were up 1.7 percent higher while Commerzbank shares were 4.1 percent higher at 1005 GMT, outperforming Germany’s blue-chip DAX index which was 0.2 percent higher.
Proponents of a merger say that a tie-up would give a combined entity — which would have an equity market value of more than 24 billion euros ($27 billion) based on Friday’s closing share prices — a 20 percent share of the German retail banking market.