March 19, 2019 / 1:10 PM / 3 months ago

Breakingviews - Cox: Really, no one else will bid for Commerzbank?

LONDON (Reuters Breakingviews) - Berlin has blessed the potential union of Deutsche Bank and Commerzbank to create a German national champion in financial services. Conventional wisdom holds that the official sanction from the Bundesregierung makes a marriage between the two challenged institutions a done deal. But it’s precisely this sort of statist logic that keeps Europe from developing more globally competitive businesses.

Martin Zielke, CEO of Germany's Commerzbank addresses the media during the bank's annual news conference in Frankfurt, Germany, February 14, 2019. REUTERS/Kai Pfaffenbach

Finance Minister Olaf Scholz’s desire to scrunch together Germany’s two largest private-sector banks is the functional equivalent of a bartender asking two drunks to prop each other up at the bar while pouring them another round. But as regulators scrutinising the discussions are acutely aware, two sick lenders won’t necessarily make a healthy juggernaut in finance. A better option would be for Germany to encourage a competitive battle for Commerzbank, which is 15 percent owned by the government.

Though the smaller of the two Frankfurt-based banks is struggling to generate an adequate return on equity, it offers numerous charms to a host of European peers, some of which are better capitalised and more effectively run. Among them are ING Groep, UniCredit, Banco Santander and BNP Paribas. Deutsche Bank, too, might better thrive in the hands of a more robust rival like UBS, which has already tackled challenges to its business model by shrinking balance sheet-heavy investment banking operations.

True, support from Chancellor Angela Merkel’s administration for domestic consolidation might provide greater political cover for difficult decisions, like potentially laying off some 30,000 workers between the two companies. But German banking hardly needs more state capitalism. A deal by diktat, like this one, sets the wrong tone. It also potentially deprives Commerzbank shareholders of a better deal.

Consider some of the advantages that the institution led by Martin Zielke might offer to a new owner. Its 1,000 branches and some 500 billion euros of assets make it the fourth-largest financial institution in the euro zone’s biggest economy. Commerzbank has a strong base with the small- and medium-sized companies that comprise the backbone of German industry. It finances a third of Germany’s foreign trade and services 70,000 corporate clients.

Then there are the specific attractions to different potential buyers. Take ING, the largest Dutch lender, whose largely online incursion has made it a top 10 player in Germany with nearly 150 billion euros of customer deposits. A deal would therefore offer some cost savings – if not on the quantum of a sale to Deutsche – and vault the combo to the second spot among all banks in the country.

Moreover, if ING moved its head office from Amsterdam to Frankfurt, it could get around the most restrictive compensation rules in the European Union. Dutch law caps bonuses to 20 percent of fixed pay for financial services firms. Redomiciling would theoretically allow Chief Executive Ralph Hamers and his executives to earn bonuses of up to 200 percent of their salaries, as permitted by EU law. The same logic applies to Dutch rival ABN Amro, whose market value of 9.8 billion euros is on par with Commerzbank. 

Besides Deutsche, UniCredit may have the most to gain from Commerz. The Milan-based bank run by Jean Pierre Mustier already owns Germany’s fifth-largest lender, HypoVereinsbank, with some 300 billion euros of assets. If the two could find 1 billion euros of annual savings, equivalent to around 15 percent of Commerzbank’s operating expenses last year, they could create up to 7 billion euros of net present value. That leaves substantial room for the Italian lender to offer a hefty premium to Commerzbank shareholders.

And there’s another possible – if currently unquantifiable – benefit should UniCredit decide to move its head office: lower funding costs. Italian banks suffer when the sovereign, which determines the cost of borrowing for all Italian entities, is treated as a pariah by bond investors. Italy now pays around 260 basis points more for 10-year money than Germany to compensate for a higher perceived risk of default.

Moving headquarters wouldn’t immediately allow UniCredit to borrow in Germany and lend in Italy: local regulators discourage the bank from moving capital and liquidity across borders. But those rules could be relaxed over time. It’s a benefit Santander might consider too, though the Spanish government’s cost of accessing credit markets is only around 100 basis points more than Germany’s.

Another bank that could consider a deal is BNP Paribas, whose 56 billion euros market value is almost three times that of Deutsche Bank’s. And though France’s biggest lender trades at only half its book value, that’s twice the multiple investors put on Commerzbank. That would make a purchase more attractive than it would be for Deutsche, which trades at around 25 percent of book.

The Parisian institution led by Jean-Laurent Bonnafé promotes itself “as a leading bank in the euro zone”. Without a strong position in the economy that accounts for a third of the currency bloc’s economy, however, BNP isn’t quite living up to its own billing.

None of these permutations are without risk. There could be culture clashes, for instance. Promised savings might be harder to capitalise across borders. After all, Deutsche Bank’s current predicament owes much to its failed two-decade campaign to compete with Wall Street investment banks.

But policymakers often talk about the creation of pan-European champions capable of competing with American and Asian rivals. If they insist on consolidation that favours the weak, that will never materialise.

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