merger talks No Thanks to Mega Bank

Employees, investors and economists rejected the idea of a Deutsche Bank-Commerzbank tie-up this week, saying a giant financial institution would founder. Deutsche Bank must accelerate its cost-cutting before considering a mega-merger, they said.
Merger interrupted: John Cryan and Martin Zielke held talks about merging Deutsche Bank and Commerzbank.

The chief executives of Germany's two largest banks, Deutsche Bank and Commerzbank, dreamed big.

At the Handesblatt Banking Summit, news emerged this week that Deutsche's John Cryan and Commerzbank's Martin Zielke had talked about the possibility of a merger in early August. Such a move would have created a megabank with a balance sheet total of €2.3 trillion, or $2.58 trillion.

The idea proved controversial. The sheer size of the merged bank worried Isabel Schnabel, a member of the German Council of Economic Experts. "For me, such a merger would be highly problematic. It would create an even larger national champion that would be far too big to let fail. That means the state would be forced to jump in, if necessary, although they want to avoid bailing out banks with taxpayers’ money,” she said.

“I think it would be much more important for the two banks to create a viable business model that also works under difficult conditions.”

A major investor echoed her concerns. As long as there's no clarity yet about future regulation, a merger is out of the question, according to Helmut Hipper, a funds manager at Union Investment.

Talk of a merger with Deutsche Bank are unnecessary and counterproductive.

The employees of the two banks reacted with downright shock. "A merger would only lead to a mega-bloodbath with enormous staff cuts at both banks and many branch closures," said Stephan Szukalski, Federal Chairman of the German Association of Bank Employees (DBV). “We can’t approve of that, let alone support it, we don't know the rationale behind it.”

Labor unions thought similarly. “Talk of a merger with Deutsche Bank is unnecessary and counterproductive,” said Verdi trade union secretary Mark Roach who is also a member of the supervisory board at Commerzbank.

Economists and labor representatives were therefore relieved that Mr. Cryan and Mr. Zielke broke off the talks after only a few weeks.

Both banks are in the middle of extensive restructuring and the need to get both back on track is so great that a merger would place too much demand on them.

The two institutions are also in the midst of a crisis of confidence. Since the beginning of the year, Deutsche Bank has lost around 40 percent of its value on the stock market. Meanwhile at Commerzbank, losses have reached 30 percent.

And investor concerns increased further when both banks performed poorly in the European Banking Authority's stress test.

This weekend, the management board of Deutsche Bank will discuss what comes next after the merger was shelved, and will discuss shareholders' concerns ahead of a strategy meeting in Milan with the supervisory board on September 15 and 16.

At the same time, managers also want to sound out whether Deutsche Bank has to extend its cost-cutting program and reduce its balance sheet more quickly and more radically than planned. They are not ruling out the sale of assets which could free up a sizeable amount of capital. Their considerations, however, do not include asset management, according to financial sources, although there has been speculation that the bank might sell this business.

Despite the criticism from employees, investors, and economic researchers, there was also cautious support for the merger plans. The German Financial Supervisory Authority was informed of the talks, for example, and Handelsblatt’ learned that it welcomed the idea at least in principle. While regulators don’t make structural policy, it wouldn’t be completely wrong in terms of financial stability to consider such a combination, said financial sources.

Regulators want the banks to do their homework before considering such a merger. Felix Hufeld, who heads the regulator known as BaFin, didn’t want to comment directly on the merger plans at Handelsblatt's conference but said, “When bank A constantly has headaches and a bank B has permanent stomach aches, a merged patient wouldn't be free of pain.”

Wolfgang Kirsch, chief executive of cooperative bank DZ Bank, also said the time wasn’t yet ripe for a major merger in Germany's banking market. “The blueprint is, of course, appealing," he said. Together the two financial institutions would have 25 million customers, he pointed out, that would be a heavyweight. “But you also have to be able to afford mergers,” Mr. Kirsch said.

Even if a merger with Commerzbank is on ice for the time being,  Mr. Cryan is convinced that consolidation is needed in Europe's banking sector. “We need more mergers, at a national level but also across national borders,” he said Wednesday at Handelsblatt's conference.

Some investment bankers say Mr. Cryan sought out the wrong partner. “A merger with Credit Suisse or Britain's Barclays would actually have made more sense than a merger with Commerzbank,” said one takeover expert.


Michael Brächer covers investment for Handelsblatt in Frankfurt, Michael Maisch is deputy chief of finance coverage for Handelsblatt, Yasmin Osman writes about banking from Frankfurt. Robert Landgraf is Handelsblatt's chief correspondent for financial markets and Frank Drost writes about financial supervision and banks. To contact the authors:  [email protected][email protected][email protected],  [email protected], [email protected]