Deutsche Bank, once the flagship European Lender on par with its American peers, is now a shadow of its former self. It feels like there is not a single week without more troubling news for the struggling giant. The Banks new leadership under Christian Sewing is continuing to cut down the very department that once helped to secure the banks prominent position on Wall Street more than a decade ago, it’s Corporate and Investment Bank. And while the turbulent times abroad has been something the bank had to deal with for quite some years now, Deutsche also begins to lose out in its domestic market, having failed to appear in the top 20 M&A League Table in Germany for the past year. Historically well connected to the domestic industry, it seems that they are losing these clients to foreign banks as well. However, in this article I would like to step away from the fancy Global Markets in New York, London or Hong Kong, and highlight what has been discussed as a possible solution to strengthen the banks position in the domestic market to start with. By merging Deutsche with Germany’s second largest lender Commerzbank, many problems the two banks are facing can be dealt with in a more efficient way, people claim.
Berlin clearly has a problem when it comes to Deutsche, its most iconic lender. In the last couple of years, the bank has come under the scrutiny of regulators for all sorts of misconducts, including a string of money-laundering scandals, coupled with bad performance in particular in its once lucrative Investment Banking division. There has been a succession of chief executives who have failed to shrink cost sufficiently and turn the ship around. Currently Christian Sewing is giving it a go, being the first CEO in a long time who does not emerge from Deutsches Investment Bank.
The German state who is already the largest shareholder in Commerzbank (because it bailed out the struggling lender back in the financial crisis in 2008) is willing to orchestrate a merger between the two banks. Olaf Scholz, German Finance Minister repeatedly emphasized how important it is that Europe’s strongest economy also has a capable bank, in particular because of its export orientation. He is a firm believer that merging the two banks is the way to go.
There are many different scenarios how this would look like in practice. For instance, it could be that the German state becomes Deutsche Bank’s largest shareholder too, and then in about 5 years force a merger between the two institutions. Alternatively, it has been discussed if Deutsche Bank could raise money from industrial companies and simply outright buy its competitor.
However, it is also important to emphasize that the two banks have been constantly rumored to tie the knot, most recently in the summer of 2016 when they ultimately decided against it because both of them were still in the middle of their respective restructuring programs.
But what are the arguments pro and con a potential merger or acquisition. Let start with the people that believe Scholz right and believe that this is the way to go. Spoiler Alert: There aren’t many. The main argument that constantly appears in this argument is the political one of “national champion”. Ultimately, each country wants to end up with a bank that plays a considerable role on the international markets as well as being a major financier for the domestic industry, not least as trade disputes throughout the world continue to grow. Where the Corporate and Investment Banking activities of Commerzbank are negligible (both in Germany and abroad), the Bank does have a strong retail brand, in particular for Small to Mid-sized clients. However, the majority of the activities of these two brands are congruent and would lead to the closure of branches and the jobs which come with them. Certainly not what the government would want. The fact that the discussions are still on the table seems almost more to be owed to the fact that it is the only remaining option and seems rather desperate. People jokingly argue that the main reason why the Government is so keen for this to happen is to spare itself the embarrassment of having to consider the injection of public money. Given the crises in which the two remaining larger private banks are in, however, there is still a historical pattern of explanation to bear. Since the crisis of 1931, German politics has been terribly afraid of a banking crisis, and the scandal-ridden collapse of the Herstatt Bank in the 1970s did not make it any better. Therefore, it seems that a pattern has emerged for crisis banks to be taken over by a stronger institute before any corpses begin to smell in the basement. Later, the burdens come to the table in the hope that the new institute can handle them. This was the case, for example, in the 1990s, when Bayerische Hypobank was threatened with real estate loans in the new federal states. In the course of this, Hypo Real Estate was created. And when Dresdner Bank was taken over by Commerzbank, it was considered run-down and it already seemed hopeless that it could survive the financial crisis.
Quite frankly, none of the supposed advantages stand up to scrutiny. The main problem is also that the two players have been focusing on very different areas, (Deutsche in investment banking, Commerzbank in trade financing), weakening the case for finding efficiency gains and savings.
The trouble with merging Deutsche Bank and Commerzbank is that both have large albeit declining user bases. To make a deal of this proportion work, there will have to be serious abatement so that the joint entity can concentrate its resources and capabilities in areas where they have a strong position in product offerings. This almost certainty comes with some sacrifices and a big political debate. The sheer size of a group of Deutsche Bank and Commerzbank is likely to cause problems with wardens and regulators. Besides, both institutions have a ton of internal problems they should address first, with both lenders nowhere near being able to pull a merger such as this off. As Bafin president Felix Hufeld put it: “Besides, two weak institutions do not automatically become a strong one”.
It will be interesting to see how this saga develops in the future. It is apparent that the downsides by far outweigh the potential advantages. However, this debate has become one which is mainly driven by politics rather than banking strategy. Crucial in this debate is how and with what force the German government is pursuing this creation of a “national champion”. Because from a strategic point of view it seems like an even bigger headache for the troubled Deutsche Bank. And that is effectively what everyone is trying to avoid, more headaches.
Fritz Waldow
Berlin clearly has a problem when it comes to Deutsche, its most iconic lender. In the last couple of years, the bank has come under the scrutiny of regulators for all sorts of misconducts, including a string of money-laundering scandals, coupled with bad performance in particular in its once lucrative Investment Banking division. There has been a succession of chief executives who have failed to shrink cost sufficiently and turn the ship around. Currently Christian Sewing is giving it a go, being the first CEO in a long time who does not emerge from Deutsches Investment Bank.
The German state who is already the largest shareholder in Commerzbank (because it bailed out the struggling lender back in the financial crisis in 2008) is willing to orchestrate a merger between the two banks. Olaf Scholz, German Finance Minister repeatedly emphasized how important it is that Europe’s strongest economy also has a capable bank, in particular because of its export orientation. He is a firm believer that merging the two banks is the way to go.
There are many different scenarios how this would look like in practice. For instance, it could be that the German state becomes Deutsche Bank’s largest shareholder too, and then in about 5 years force a merger between the two institutions. Alternatively, it has been discussed if Deutsche Bank could raise money from industrial companies and simply outright buy its competitor.
However, it is also important to emphasize that the two banks have been constantly rumored to tie the knot, most recently in the summer of 2016 when they ultimately decided against it because both of them were still in the middle of their respective restructuring programs.
But what are the arguments pro and con a potential merger or acquisition. Let start with the people that believe Scholz right and believe that this is the way to go. Spoiler Alert: There aren’t many. The main argument that constantly appears in this argument is the political one of “national champion”. Ultimately, each country wants to end up with a bank that plays a considerable role on the international markets as well as being a major financier for the domestic industry, not least as trade disputes throughout the world continue to grow. Where the Corporate and Investment Banking activities of Commerzbank are negligible (both in Germany and abroad), the Bank does have a strong retail brand, in particular for Small to Mid-sized clients. However, the majority of the activities of these two brands are congruent and would lead to the closure of branches and the jobs which come with them. Certainly not what the government would want. The fact that the discussions are still on the table seems almost more to be owed to the fact that it is the only remaining option and seems rather desperate. People jokingly argue that the main reason why the Government is so keen for this to happen is to spare itself the embarrassment of having to consider the injection of public money. Given the crises in which the two remaining larger private banks are in, however, there is still a historical pattern of explanation to bear. Since the crisis of 1931, German politics has been terribly afraid of a banking crisis, and the scandal-ridden collapse of the Herstatt Bank in the 1970s did not make it any better. Therefore, it seems that a pattern has emerged for crisis banks to be taken over by a stronger institute before any corpses begin to smell in the basement. Later, the burdens come to the table in the hope that the new institute can handle them. This was the case, for example, in the 1990s, when Bayerische Hypobank was threatened with real estate loans in the new federal states. In the course of this, Hypo Real Estate was created. And when Dresdner Bank was taken over by Commerzbank, it was considered run-down and it already seemed hopeless that it could survive the financial crisis.
Quite frankly, none of the supposed advantages stand up to scrutiny. The main problem is also that the two players have been focusing on very different areas, (Deutsche in investment banking, Commerzbank in trade financing), weakening the case for finding efficiency gains and savings.
The trouble with merging Deutsche Bank and Commerzbank is that both have large albeit declining user bases. To make a deal of this proportion work, there will have to be serious abatement so that the joint entity can concentrate its resources and capabilities in areas where they have a strong position in product offerings. This almost certainty comes with some sacrifices and a big political debate. The sheer size of a group of Deutsche Bank and Commerzbank is likely to cause problems with wardens and regulators. Besides, both institutions have a ton of internal problems they should address first, with both lenders nowhere near being able to pull a merger such as this off. As Bafin president Felix Hufeld put it: “Besides, two weak institutions do not automatically become a strong one”.
It will be interesting to see how this saga develops in the future. It is apparent that the downsides by far outweigh the potential advantages. However, this debate has become one which is mainly driven by politics rather than banking strategy. Crucial in this debate is how and with what force the German government is pursuing this creation of a “national champion”. Because from a strategic point of view it seems like an even bigger headache for the troubled Deutsche Bank. And that is effectively what everyone is trying to avoid, more headaches.
Fritz Waldow