LONDON (Reuters Breakingviews) - So much for pan-European unity. Deutsche Bank is in merger talks with domestic rival Commerzbank. Chief Executive Christian Sewing was forced into acting sooner than he’d have liked due to concerns that other banks, including France’s BNP Paribas, might also covet the 8 billion euro lender. A hint of nationalism may play well with German policymakers. But the banks will still need to explain how a deal makes sense for shareholders.
BNP boss Jean-Laurent Bonnafé recently ruled out M&A after a dispiriting set of results. Nonetheless, directors on Deutsche’s management board granted Sewing a mandate to begin preliminary discussions in February, according to a Deutsche Bank source. A possible French interloper acquiring the second-biggest German bank might lubricate matters with regulators and Berlin, which has called for the creation of a national banking champion, and owns 15 percent of Commerzbank.
Yet to convince shareholders, Sewing and Commerzbank’s Martin Zielke will need to answer four key questions. Firstly, why should Commerzbank accept a deal? The benefits to Deutsche – like lower funding costs from Commerzbank’s deposits and more stable banking revenue – are obvious. But Commerzbank spent a decade shedding its investment bank to become a straightforward retail and corporate lender. Suddenly, merging with the biggest trading desk in Europe would represent a U-turn.
Secondly, what kind of premium could Deutsche afford? Paying 10.7 billion euros, a 30 percent increase on Commerzbank’s market value, would take Deutsche’s common equity Tier 1 ratio below 11 percent, well short of management’s 13 percent target threshold. Paying in shares would dilute investors for the second time since April 2017.
Third, what happens to Deutsche’s investment bank? Sure, the proportion of volatile revenue from trading and capital markets would shrink from 37 percent to 27 percent in a combined entity, using 2018 figures. But the unit which accounted for two-thirds of Deutsche’s risk-weighted assets remains a massive drag on profitability, achieving a less than 1 percent return on tangible equity.
Lastly, how will a combined bank achieve a 10 percent return on its capital? Deutsche made a piddling 0.5 percent return in 2018 and Commerzbank a paltry 3.4 percent. Without substantial synergies, it is unclear how combining two lame lenders would improve their capacity to deliver better returns. If they can’t answer these questions in plain German, at least one of them may have to do so in fluent French.
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