merger talks A Financial Fantasy

The idea of fusing Deutsche Bank and Commerzbank into a national champion is enticing but unrealistic, writes Handelsblatt’s Editor in Chief.
Frankfurt morning skyline before Handelsblatt Banking Summit opening.

Whoever wants to ensure the future of his company must now and then take a different road, think outside the box and create a new vision.

That might be what John Cryan and Martin Zielke, the heads of Deutsche Bank and Commerzbank, thought a few weeks ago when they pondered a merger of Germany’s two largest financial institutions.

The two bank managers apparently share a longing for a quick way out of their permanent crisis of plummeting share prices, collapsing profits and persistent loss of confidence.

Mr. Cryan and Mr. Zielke are well advised to first develop a business model for their own banks that can generate reliable profits on their own power, and that will convince shareholders.

Of course, the dream of a strong giant German bank is enticing — even if the sheer size of a bank is no guarantee it can survive, as the spectacular failure of U.S. investment bank Lehman Brothers has shown.

A national champion could be created in a single blow by merging Deutsche Bank and Commerzbank, whose costs structure would be significantly better through considerable savings in financial management — the so-called “back office” — than in today’s separate institutions.

The new megabank would be, with the realization of this synergy effect, decidedly more profitable, which financial regulators would surely appreciate. It would also be easier for it to grow in the hotly-contested private customer segment, as in the financing of exporting firms in overseas expansion.

From a business rationale, a German bank could be created that is not only system-relevant but also internationally competitive. To that extent, Mr. Cryan’s and Mr. Zielke’s thought experiments certainly make sense.

But, as is often so in life, reality is more complicated.

The simple fusing of Deutsche Bank and Commerzbank won’t solve all their problems. This hope is too simple; the consolidation of the banks is not an end in itself.

The president of the German Financial Supervisory Authority, or BaFin for short, is right in his assessment that merging the two ailing banks wouldn’t result in one strong financial institution.

As a matter of fact, the two banks haven’t yet developed a viable business plan for coping with the challenges of zero interest rates, strict regulation and digitalization.

The banks’ share prices are proof of a massive lost of confidence by investors. Since the beginning of the year, Deutsche Bank shares have lost 40 percent, while Commerzbank dropped 30 percent.

This downward trend will hardly change in the foreseeable future if the two banks continue to report miniscule profits and trail behind the competition.

So Mr. Cryan and Mr. Zielke are well advised to first develop a business model for their own banks that can generate reliable profits on their own power, and that will convince shareholders.

There is still a lot that is unclear about how the two long-established institutions can find their way back to their old strength.

Both bank chief executives swear on the opportunities digitalization will bring, but that is no unique feature that will ensure survival. Postbank, HypoVereinsbank, savings banks and credit unions also are focusing on modern applications to make banking easier for customers.

At the same time, the reduction of costs is not something that can be managed overnight. In the opinion of Deutsche Bank’s Mr. Cryan, the Frankfurt financial giant has 25 to 30 percent too many employees compared to its competitors.

It isn’t just Deutsche Bank’s and Commerzbank’s vulnerable business models that make a merger of the two banks appear impossible. Added to that are two other significant obstacles: Deutsche Bank’s many unresolved legal disputes and the federal government’s stake in Commerzbank.

It is hardly likely that Deutsche Bank shareholders would vote in favor of a merger with the partly-nationalized Commerzbank. The government’s shares at the moment might only be 15 percent, but a new giant bank partly-owned by the government would have to live from the beginning under a regulatory cloud.

Given Commerzbank’s current stock prices, the government would have no interest in selling its shares and writing off billions in one-off state aid. It’s hardly imaginable that Finance Minister Wolfgang Schäuble or Chancellor Angela Merkel would care to explain such an empty bargain to voters.

On the other hand, Commerzbank can have no interest in joining a bank that is forced to keep billions set aside for unresolved legal cases. No manager would want to take on that risk.

Still, that doesn’t mean a fusion of Germany’s two largest banks is out of the question. But at the moment, the idea is nothing more than an enticing fantasy.

 

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