Deutsche Bank and Commerzbank abandoned their merger talks on Thursday, with the risks of doing a deal, restructuring costs and capital demands dashing efforts to forge a German mega-bank.
After nearly six weeks of talks, Germany’s two largest banks announced that their high-level negotiations about a tie-up had ended, confirming an earlier Reuters report and raising questions about the future of the Frankfurt-based rivals.
The announcement followed a final in-person meeting early on Thursday between Deutsche Bank Chief Executive Christian Sewing and his Commerzbank counterpart Martin Zielke, two people said.
Both CEOs said a deal would not have created sufficient benefits to offset the risks and costs of a merger, which had been opposed by unions fearing 30,000 job losses, and raised concerns among investors and regulators.
hile the talks are over, investors doubt either bank can go it alone for long given their low levels of profitability.
German government officials, led by Finance Minister Olaf Scholz, had pushed for a tie-up to create a national banking champion and end questions over the future of both banks, which have struggled to recover since the financial crisis.
Deutsche Bank’s 2018 return on equity was just 0.4 percent, trailing far behind rival U.S., and increasingly other European, investment banks, while Zielke said this month that Commerzbank does not have the market share for costly investments, fuelling speculation of an alternative tie-up if talks fell through.
Shares in Commerzbank were 2.1 percent lower at 1005 GMT, while Deutsche Bank’s were up 3.6 percent.
Deutsche Bank will now face pressure to make more radical changes, such as cuts to its U.S. investment bank as advocated by regulators and some major investors. It is already looking at a deal for its asset management unit DWS.
“Deutsche Bank will continue to review all alternatives,” Germany’s largest bank said.
Bidders in the wings
Employees of both banks immediately welcomed the news, although a senior Commerzbank manager acknowledged it opened the door to further uncertainty as foreign competitors circle.
“It is clear that others will now come out of the woodwork with offers and ideas,” the manager told Reuters.
Commerzbank’s chief executive Martin Zielke, has told employees that doing nothing was “not an option”.
Both UniCredit and ING Groep have expressed interest in Commerzbank, which is Germany’s No. 2 lender and 15 percent owned by the government, sources have said.
UniCredit and ING declined to comment after news that talks between Deutsche Bank and Commerzbank had failed.
Some major Deutsche Bank investors had questioned the deal’s logic and were unwilling to step up with any extra cash to get it done, while credit ratings agencies had warned of risks.
The European Central Bank would have asked Deutsche Bank to raise fresh funds before it gave the go-ahead for a merger, a person with direct knowledge of the matter said.
And the ECB’s single supervisory board, which is scheduled to meet on Thursday, had not received a formal application from the banks about a merger, another source had said.
Deutsche Bank on Thursday also published preliminary earnings in which it said it expects to post a first-quarter net profit of about 200 million euros ($223 million), beating analysts’ expectations of 29 million.
“A merger would have been an enormously complicated and protracted undertaking. In the end, reason has won,” said Ingo Speich, head of sustainability and corporate governance at Deka Investment, a shareholder in both banks, adding they urgently need to address their strategies.
Gerhard Schick, finance activist at Finanzwende and a former member of the German parliament, welcomed the end of talks but cautioned that Deutsche Bank remains “too great a risk”.
“The bank is still far too large and would probably have to be rescued in an emergency,” he said.
Germany Needs a Plan B
The collapse of merger talks between Deutsche Bank AG and Commerzbank AG is a crushing defeat for German Finance Minister Olaf Scholz.
While Chancellor Angela Merkel steered clear of the proposed deal, Scholz’s fingerprints were all over it. A potential Social Democratic challenger to lead the next government, Scholz was the biggest advocate for a merger despite the threat of thousands of job losses, and now needs a new plan to fix Germany’s troubled financial sector.
Scholz and his deputy Joerg Kukies, a former Goldman Sachs banker, had been the key political agitators behind the merger plan, arguing that Germany’s lenders are undersized and ill-equipped to support the country’s exporters. He publicly called for an “industrial policy” for banking -- effectively code for state intervention -- and his aides held frequent discussions behind closed doors with Deutsche Bank officials including Chief Executive Officer Christian Sewing and Chairman Paul Achleitner.
“Besides Scholz and Kukies, nobody wanted this merger,” said Olav Gutting, a lawmaker for Merkel’s CDU party who sits on the finance committee of the lower house of parliament. “The time and energy that’s been frittered away because of the finance ministry’s pressure could have been better spent on restructuring the two.”
Global Partners
Scholz’s grand plans were dealt a major setback after Deutsche Bank and Commerzbank walked away from creating a German banking giant after six weeks of exploratory talks. He accepted the defeat, but reaffirmed his stance that Germany needs stronger banks.
“Germany’s globally active industry needs competitive credit institutions that can accompany it around the world,” Scholz said in an emailed statement. “Deutsche Bank and Commerzbank have discussed closer forms of cooperation. Such cooperation only makes sense if it adds up in economic terms and aims toward a robust business model.”
Discussions of the risks in Germany’s financial industry have intensified since Scholz was appointed last year. The Financial Stability Committee -- a group of regulators and finance ministry officials -- warned the government in December that the country’s banks could face troubles ahead if a deepening economic downturn hits their balance sheets and triggers a capital squeeze, according to people familiar with the discussions.
Deutsche Bank is a particular concern in political circles, said the people, asking not to be identified discussing internal deliberations. The country’s largest lender is considered systemically relevant by regulators and has continued to struggle after a series of missteps during the financial crisis a decade ago.
Chancellor Ambitions
The finance ministry will now need a Plan B after Scholz exposed the shortcomings of Germany’s banking landscape with his controversial campaign to create a national banking champion. Amid fears of job cuts and financial risk from combining two struggling lenders, the plan faced widespread political opposition, including from allies in his own Social Democratic Party.
The fallout could hamper Scholz’s ambitions to potentially run for chancellor and hamper the party ahead of elections for the European parliament and the city state of Bremen in late May. But it could have been tougher for the SPD -- which has fallen below the Greens in recent polls -- if a deal went ahead.
“A merger decision would have caused bigger problems for us as we would have to deal politically with the consequences,” said Ingrid Arndt-Brauer, a SPD lawmaker on the Bundestag’s finance committee. “But with the end of the merger talks, the problems in the banking sector haven’t been solved. They continue to exist and need to be addressed.”
(Published by Reuters and Bloomberg, April 25 2019)