Time Is Running Out for Deutsche Bank to Stand Alone
Germany wants a strong bank that its major companies can rely on in a world increasingly dominated by American banks
By Paul J. Davies
As Deutsche Bank DB -1.83%▲ has been quietly busy with its latest restructuring, chatter about a potential merger between Germany’s largest lender and its smaller rival Commerzbank CRZBY -1.79%▲ has grown louder.
What makes this chatter stand out is that its source has increasingly been political. This matters for Deutsche: If it fails to demonstrate decisively that it can improve its very poor profitability, pressure from Berlin and elsewhere to do something more radical may become irresistible.
Germany wants a strong bank that its major companies can rely on in a world increasingly dominated by American banks. Deutsche needs to show it can fulfill that role. Its results for the rest of this year, starting with third-quarter numbers on Wednesday, could seal its fate.
Deutsche has made clear that its only focus for now is finding its feet and showing it can make stable—if low—returns. If Christian Sewing, chief executive, can do this by the end of 2019, he may be more interested in pursuing a cross-border deal to build a more powerful pan-European bank.
His task, however, is a hard one. He should hit cost-cutting targets this year and next—targets were missed by his predecessor—but arresting the fall in revenue will be a much bigger struggle.
Commerzbank is in the middle of its own cost cuts, though its task is simpler. But neither bank is expected by analysts to make a return on equity much above 5% in the foreseeable future.
Germany is a tough market where the five biggest lenders have only a 30% share, according to Citigroup ,compared with a 60% average in Europe as a whole. Many German banks also aren’t shareholder owned and so don’t have the same profit imperative. Even a merger of Deutsche and Commerzbank may not make much of a difference to anyone’s market power. Analysts at Berenberg call it the last option for Deutsche.
However, investors seem to view their fates as intertwined: The two banks’ stock prices have traded with a correlation of nearly 90% this year. And a deal could make sense for other reasons.
A tie-up could strengthen Deutsche’s balance sheet and, critically, lower its funding costs.
Funding used to be Deutsche’s key competitive advantage, but that vanished when Europe’s new bank bailout rules made its bonds much more risky, according to Goldman Sachs .
The twin tower skyscraper headquarters of Deutsche Bank are reflected in the windows of a neighboring office block in Frankfurt, Germany. Photo: Alex Kraus/Bloomberg News
Commerzbank would lift the share of cheap deposits in its funding base and make the German government, which currently owns 16% of Commerzbank, a major shareholder.
Prospects for a deal have been helped by Commerzbank’s share price collapse this year, which means Deutsche would need to issue far less of its own heavily discounted equity to buy its rival. The different asset types of the two lenders would also produce a better leverage ratio than Deutsche has alone —solving another key problem for the larger bank.
This isn’t a deal to inspire, but it has merits. As a last resort, it may be closer than Deutsche likes to think.
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