BFGB: Big Friendly German Bank?

By: Andrea Ferrell

With a slowing German economy, the merger between the German Giants Deutsche Bank and Commerzbank was always going to be hard to pull off

April 29, 2019 Preface: The merger between Commerzbank and Deutsche Bank has fallen through as Deutsche Bank says the merger “would not have created sufficient benefits to offset the additional execution risks, restructuring costs and capital requirements”

As the American financial markets celebrated their first decade since the Great Recession, the European financial markets cannot celebrate the same milestone. The repercussions of the ultra low interest rate environment created by the Great Recession and the European Debt Crisis of 2012 are still being felt throughout Europe. Italy, for example, entered a recession at the end of 2018. Germany, the usual indicator of the health of the European economy, is no exception to the slowdown. There has been a decline in German manufacturing orders, which, in conjunction with other unfavorable data, has resulted in negative yields on long term German bonds. Germany’s two largest banks, Deutsche bank and Commerzbank, heavily impacted by the weakening Eurozone economy,  aimed at a merger with lofty goals to create a banking giant. But the variety of obstacles both banks faced caused talks to fall apart. Let’s explore why.

Before the Great Recession of 2008, Deutsche bank was one of the “best” banks in the world. Their investment banking division was top ranked, and Deutsche was considered a “bulge-bracket bank.” However, after the 2008 crisis, Deutsche began to deal with scandal after scandal. Fines for the manipulation of the LIBOR rate, money laundering cases and bets on Brexit had eroded the once powerful bank. In June of 2018, they failed a Federal Reserve-mandated Stress test, demonstrating their weakening profitability. Deutsche’s problems stemmed from high costs and low revenue growth (which were further exacerbated by the low interest environment of Europe and the highly fragmented domestic banking sector in Germany). There had been some promising signs of improvements in Deutsche bank’s balance sheet when the bank reported positive profitability for the year of 2018, whereas annual income had been negative for 2016 and 2017.

One of Deutsche’s rivals, Commerzbank, saw similar problems. Like Deutsche Bank, Commerzbank had many scandals surrounding money laundering. After the 2008 recession Commerzbank was bailed out by the German government, and consequently the German government now owns 15% of Commerzbank. Unlike Deutsche, Commerzbank has no investment bank and relies solely on its commercial bank to generate profits. Commerzbank conducts most of its business in Germany, where profitability for retail banks is hard to come by because those looking for loans have a plethora of options to visit (with over 1,600 different banks in Germany, market space is tough).

A merger between these two weakening banks had been brewing for years, and finally, formal talks were announced on March 17, 2019.

Proponents of the merger argued that it would allow these two weak banks to lean on each other and support their respective weak spots. If the merger were to be successful, then the combined bank would have a combined balance sheet of over $2T and become the third largest European bank. The deal was supported by the German government, but was met with a variety of obstacles that impeded its success.

The first was union resistance. The banking workers, represented by the union Verdi,  expressed negative sentiment towards the deal. A merger of this size would have resulted in a loss of about 30,000 jobs, so union opposition was unsurprising. Likewise, Germany’s strict labor laws and regulations regarding the removal of workers requires a long and costly process.

In addition to the workers, the merger faced opposition from shareholders, who did not want the value of their shares diluted. While the German government already supported the deal, Deutsche’s had other significant shareholders with competing interests, such as the Chinese conglomerate HNA Group and the Qatari royal family. Blackrock, a shareholder in both banks, had stated that it would have had to see further details of the deal before making any judgements. The last obstacle was from European Central Bank regulators, who wanted Deutsche bank to merge with a stable cross-border bank.

This merger between Deutsche bank and Commerzbank could have restored the lost pride of the German banking industry. If the merger were  successful, the combined bank would have been large enough to compete with the highly fragmented German banking landscape and on the larger world scale. Likewise, European banks could have gotten a boost from a bank with such a large balance sheet as many had been dealing with the same stagnant growth  across Europe. But it is significant to note that the combination of the already two weak banks could have created a weaker bank that was destined to go under.

Works Cited:

Image source: https://www.fnlondon.com/articles/deutsche-bank-and-commerzbank-in-formal-merger-talks-20190317

Aarons, S. (2018, June 24). Why Deutsche Bank Can’t Just Shake Off Its Problems. Retrieved from https://www.bloomberg.com/news/articles/2018-06-24/why-deutsche-bank-can-t-just-shake-off-its-problems-quicktake

Desjardins, J. (2019, March 11). Chart: The Epic Collapse of Deutsche Bank. Retrieved from https://www.visualcapitalist.com/chart-epic-collapse-deutsche-bank/

Kowsmann, P. (2019, March 25). How a Merger Between Deutsche Bank and Commerzbank Stacks Up. Retrieved from https://www.wsj.com/articles/how-a-merger-between-deutsche-bank-and-commerzbank-stacks-up-11553506201?mod=searchresults&page=1&pos=15

Palumbo, A. W. (2019, April 08). Germany’s economy: Should we be worried? Retrieved from https://www.bbc.com/news/business-47802235

Riley, C. (2019, March 18). 30,000 job cuts and muddled strategy could doom Germany’s big bank merger. Retrieved from https://www.cnn.com/2019/03/18/investing/deutsche-bank-commerzbank-merger/index.html

Storbeck, O. (2019, April 09). Commerzbank pledges to maintain employee interests as Deutsche Bank merger talks continue. Retrieved from https://www.ft.com/content/6d157b9e-5ae6-11e9-939a-341f5ada9d40

Strasburg, J., Kowsmann, P., & Pancevski, B. (2019, March 17). Deutsche Bank and Commerzbank Enter Formal Merger Talks. Retrieved from https://www.wsj.com/articles/deutsche-bank-and-commerzbank-plan-to-announce-formal-merger-talks-11552818003?mod=searchresults&page=2&pos=6

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