Deutsche Bank AG and Commerzbank AG agreed to enter into formal merger talks as both lenders run out of time to show they can grow on their own.
The companies confirmed the move to deeper discussions in statements on Sunday. Bloomberg first reported that the banks’ boards were meeting to approve formal talks, after the government signaled it wouldn’t stand in the way of job and cost cuts. There’s no certainty a deal will occur, the banks said.
The decision takes the German banks a step closer to a historic deal that would create Europe’s fourth-largest lender by assets and help fend off hostile suitors.
It caps months of deal speculation and behind-the-scenes discussions with the government about the best ways to stabilise Germany’s largest listed lenders, which have struggled to restore revenue growth after deep cuts to their investment banking units and are now encountering an economic slowdown.
“I have consistently stressed that consolidation in the German and European banking sector is an important topic for us,” Deutsche Bank Chief Executive Officer Christian Sewing said in a letter to employees. “We have to assess how we want to play a part in shaping it.”
Labour representatives on Deutsche Bank’s supervisory board have said they oppose a merger, arguing a combination would fail to achieve the goal of strengthening the bank while resulting in massive staff cuts. As many as 30 000 positions could be at risk if a deal were agreed, according to people familiar with the matter.
The Finance Ministry is favouring a deal to ensure the country has a lender with global reach to support the export-driven economy, people familiar with the matter have said. The country still owns a large stake in Commerzbank after a bailout.
The ministry said in an emailed statement that it “notes” the decision to start open-ended talks and that it’s in “regular contact” with all parties involved.
While it’s not clear how a merger would be structured, Deutsche Bank may need to raise about 8bn euros from shareholders or through sales of holdings such as its DWS Group asset management business, according to an estimate by Christian Koch, a DZ Bank analyst. Allianz SE has shown interest in DWS and is exploring the possibility of combining it with its own asset management arm, according to people familiar with the matter.
“We will only pursue options that make economic sense, building on the progress we made in 2018,” Sewing said in his letter. “Our stated aim remains to be a global bank with a strong capital markets business - based on a leading position in our home market in Germany and in Europe, and with a global network.”
The two companies previously discussed a merger in the summer of 2016. Both Commerzbank CEO Martin Zielke and Deutsche Bank’s Sewing were part of those discussions, though Sewing was head of the retail division at the time. The talks fell apart and the lenders embarked on their respective restructurings.
Almost three years later, their turnaround plans are sputtering. Commerzbank has dropped most of its 2020 financial targets after cutting its revenue outlook. Within Deutsche Bank, doubts are growing that it will be able to reach its goals. Sewing, tapped a year ago as CEO with a mandate to accelerate restructuring efforts, has recently given up his resistance to pursuing bolder steps, 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, the people have said.
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 is said to see an expansion of Deutsche Bank’s retail deposit base - which Commerzbank would bring - as one way to lower funding costs.
The recent decision by the European Central Bank to push out the expected first interest rate increase has exacerbated the situation as both banks have said that they will struggle to meet their long-term profitability target in the current low interest rate environment.
The idea back during the banks’ talks 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, a person involved in the talk has said. Deutsche Bank’s trading operations would have remained separate, perhaps with a view to selling or merging them with another bank at some point.
Increasing the deposit base
Proponents of a deal have said it will help the firms cut cost by eliminating branches and thousands of jobs, while pooling investment in information technology. They also point to the increased deposit base, which could help reduce funding costs for Deutsche Bank’s struggling securities unit.
Critics have said a merger would lock both companies into several more years of restructuring, with high execution risks, and doesn’t fix the real problems at Deutsche Bank’s securities unit. Several influential Deutsche Bank investors have said they’re wary of a merger as it will dilute their stakes at a low valuation. Both lenders lost more than half of their stock market value last year alone, and are down more than 90% from their peaks.
If a deal goes ahead, the new bank will be “busy with itself for years to come,” said Stefan Mueller at DGWA, an investment advisory boutique based in Frankfurt. “We continue to prefer a big European solution to counter the dominance” of US banks.