FRANKFURT/LONDON (April 25): Deutsche Bank AG and Commerzbank AG ended talks on a historic tie-up, throwing the future of the lenders into question after a series of failed turnaround plans.
More than five weeks of negotiations and the Finance Ministry’s push to forge one strong institution out of two struggling firms failed to overcome the economic and political obstacles to combining the country’s biggest listed banks.
The failure to agree on a deal now forces Deutsche Bank, once Europe’s dominant financial institution, to come up with its fifth turnaround plan since 2015 and allay investor concern about how it will revive growth and boost shareholders returns. For Commerzbank, still 15%-owned by the federal government, a foreign takeover may be in the cards down the road, with lenders including ING Groep NV and UniCredit SpA said to be interested in an acquisition.
“There’s an urgent need now to refine their strategy,” said Ingo Speich, chief of sustainability and corporate governance at Deka Investment. “Calling off a national merger is opening the door for consolidation on a European level.”
Deutsche Bank gained as much as 4.8% in Frankfurt before reversing gains to trade 0.4% lower at 1:20 p.m. local time. The bank’s riskiest bonds slumped and the cost to insure notes against default surged to the highest in a month. Commerzbank, whose shares had risen after the talks were announced, declined as much as 3.7%.
The companies decided that attempting to integrate the two banks would be too difficult to execute and also cited the restructuring costs and additional capital requirements, according to a statement on Thursday. Deutsche Bank said it would continue to review “all alternatives to improve long-term profitability and shareholder returns”.
“We do envisage that, over time, consolidation will happen and Deutsche Bank wants to be a part of that,” Chief Financial Officer James von Moltke said in an interview.
Deutsche Bank, which is scheduled to report detailed first-quarter earnings Friday, signaled that the long slide in its franchise continued at the start of the year, with the investment bank driving another drop in revenue. Market conditions improved toward the end of the quarter and the bank is moving in the right direction, Sewing told staff in a memo.
Christian Sewing, chief executive officer of Deutsche Bank, and his counterpart at Commerzbank, Martin Zielke, had been in talks about a takeover since mid-March, but soon encountered massive opposition from labour representatives and strong criticism from key shareholders. Sewing is already working on a Plan B to present to shareholders, according to people with knowledge of the matter.
“After thorough analysis, we have concluded that this transaction would not have created sufficient benefits to offset the additional execution risks, restructuring costs and capital requirements associated with such a large-scale integration,” the CEOs of both banks said in statements using identical wording, and thanking each other for constructive talks.
Regulators rushed to assure investors, with the Bundesbank saying both banks “fulfill supervisory expectations for solid and stable banks” and their restructuring efforts are “showing first positive results.”
Deutsche Bank remains one of the most systemically critical banks in the world — with assets of about US$1.5 trillion — underscoring German Finance Minister Olaf Scholz’s desire to reverse the erosion of its franchise. But labour unions vehemently opposed the loss of jobs from a takeover of Commerzbank and lawmakers across the spectrum distanced themselves from Scholz. Large shareholders such as Qatari investors and BlackRock Inc have questioned the logic of a deal.
The talks were a desperate effort to strengthen two lenders whose shares had lost more than 90% of their value from their peak, and to shore up a domestic banking industry that has fallen far behind Wall Street. Scholz on Thursday reiterated his view that Germany’s industry needs competitive banks that can serve companies around the world.
“Deutsche Bank and Commerzbank have discussed closer forms of cooperation,” he said. “Such cooperation only makes sense if it adds up in economic terms and aims toward a robust business model.”
Both lenders are struggling until today with the fallout from an aggressive expansion that ended with the financial crisis. While Deutsche Bank survived that crash without direct aid, it paid more than US$18 billion in misconduct fines in the last decade. Commerzbank was bailed out after it bought Dresdner Bank from insurer Allianz SE in 2008, two weeks before the collapse of Lehman Brothers Holdings Inc. Continued negative interest rates, a fragmented European banking market, and cutthroat competition at home added to their woes.
“A merger would have been an enormously complex and long endeavour,” said Speich. “In the end, it’s a victory of reason.