DEUTSCHE Bank AG’s decision to scuttle merger talks with rival Commerzbank AG leaves the banking giant at square one in restoring investor confidence as it struggles to compete with stronger U.S. rivals.
A merger, while unpopular among shareholders, had backing from German government officials who hoped to craft a domestic powerhouse out of two ailing banks. Those hopes nose-dived Thursday when both banks said deal discussions failed, citing the costs and complexity of pulling off a merger.
Deutsche Bank said a merger “would not have created sufficient benefits to offset the additional execution risks, restructuring costs and capital requirements.”
The decision resolved one looming question around the merger but now raises others, especially what’s next for Deutsche Bank. Bank officials and investors have flagged that substantial changes to the bank’s structure, including a new round of cuts to its investment bank, raising more capital and shuttering of businesses, may be required. Other potential deals could also surface.
Chief executive Christian Sewing, when asked Thursday about the possibility of Deutsche Bank being taken over by a non-German rival, said he expects European bank consolidation in the coming years, but “I don’t want to be a mere observer of that, I’d rather be an active participant,” according to an interview with the German newspaper Bild.
In the months before publicly acknowledging the Commerzbank talks, Mr. Sewing and other executives insisted they didn’t want or need to consider a merger, saying the bank’s strategy was paying off.
Douglas Braunstein, the former JPMorgan Chase & Co. finance chief whose hedge fund, Hudson Executive Capital LP, acquired a 3.1% stake in Deutsche Bank late last year, said Thursday he’s pleased the bank opted out of a merger based on what he called core economic analysis. “We also expect they’re going to continue to do work around a more fulsome plan that delivers returns to shareholders,” he said.
Cerberus Capital Management LP, a top investor in both banks, which also serves as a paid adviser to Deutsche Bank, had signaled support for a merger, people close to the firm said. A spokesman declined to comment on the outcome of the talks Thursday.
Executives will be in the hot seat Friday when Deutsche Bank reports first-quarter earnings. It disclosed some figuresearly on Thursday, including better-than-expected first-quarter profits but continuing revenue declines in its dominant investment bank and for the bank overall. More details about strategic plans could come at the bank’s annual meeting, scheduled for May 23.
Deutsche Bank has explored options to reshape various pieces of the bank, including creating a so-called bad bank to house impaired and unwanted assets and businesses that could be earmarked for closure, The Wall Street Journal reported earlier this week.
Officials with its separately listed asset-management arm, DWS, have discussed a potential deal to combine with Swiss rival UBS Group AG’s asset-management business, among other options, according to people familiar with the matter.
The talks aren’t exclusive or guaranteed to result in a deal, and timing of any potential agreement is uncertain, according to the people. UBS CEO Sergio Ermotti declined to comment Thursday on any potential deal, saying UBS’s asset-management unit “fits well into the business mix we have.”
Deutsche Bank’s investment-banking chief Garth Ritchie told staff Thursday the business is “continually reviewing our business mix,” according to an internal email reviewed by the Journal. He added that the strategy launched a year ago “is working particularly when you consider the challenging market environment that has impacted banks on both sides of the Atlantic.”
Out-of-control expenses have dogged the lender for years. Mr. Sewing and his team have gotten credit for meeting targets over the past year, but costs remain a constraint on the bank’s options for launching into another overhaul.
The bank’s funding costs also weigh on its profits and are a sign of the unease others in the market feel about Deutsche Bank’s health. It pays more than peers to borrow money from wholesale funding markets, cutting into its profit when lending to corporate clients and hedge funds.
Key measures of its funding costs slid Thursday on the news that the deal fell through. Deutsche Bank’s 6% perpetual bond trades well below its issue price of €100 and dropped to €87.95, compared with €89.60 on Wednesday, according to FactSet. Most banks’ similar securities trade at close to their issue price.
Credit default swaps that protect investors in the event Deutsche Bank defaults on its debt also ticked up Thursday. Debt investors were rosier about the prospects of a merger than most shareholders, expecting that a combined bank would be safer with the German government as a shareholder through its stake in Commerzbank.
German government officials who had pushed for a Deutsche-Commerzbank tie-up also face tough choices in how to support its banking industry, considered a weak point in an economy that is otherwise the envy of Europe.
German Finance Minister Olaf Scholz, who had strongly pushed for merger talks, said Thursday that German industry needs lenders that are competitive on a global scale, and a merger might have benefited the country. “Such cooperation only makes sense when there is a commercial gain from it and when it guarantees a solid business model,” he said.
Officials worry that the failure to create a more dominant German lender could leave the country without a strong international bank to serve its many companies that sell or invest abroad, especially if Germany suffers an economic downturn.
People familiar with the officials’ thinking worry Germany’s economy would suffer further if only U.S., Chinese or other international banks have the capital and know-how German companies require on the global stage.
Strict European Union regulations on state aid make it challenging for Berlin to directly support Deutsche Bank, according to an official close to Mr. Scholz.
In a sign of the weakened hand of German banks, Deutsche Bank in its home market last year lost the top investment-banking spot to JPMorgan, according to revenue-based rankings from data provider Dealogic.
The failure to unite the two ailing lenders could unleash fresh attempts by other competitors to scoop up one or both of the banks. Commerzbank is seen as a likely target of other European banks seeking growth in Europe’s largest economy. The German government has a roughly 15% stake in Commerzbank.
The push to unite Germany’s biggest banks comes amid a difficult economic backdrop. The eurozone’s negative interest rates, which suppress net-interest margins, or the difference between what banks pay to depositors and what they receive from borrowers, weigh on banks’ ability to generate profits and build capital. That is especially true against their American rivals, who have bigger home markets and positive interest rates helping to generate massive profit cushions.
Germany also faces a hypercompetitive market, which is home to almost 1,600 banks, none with any major market-share advantages. - WSJ
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