(More Bank) – Deutsche Bank AG closed the year 2018 as the worst-performing European bank stock, following a series of scandals and what appears to be a weak last quarter. The constant rumor of bad news has revived the rumor that the largest German lender could be forced to seek a radical solution to its problems: a merger with Commerzbank AG, a national rival that has been close to Deutsche Bank in terms of loss of value last year.
The feeling that the current discomfort can not last has increased. Here are the main people who could make or break such a move. The representatives of their institutions refused to comment.
The CEO of Deutsche Bank is still hoping to show that his recovery plan – the bank's fourth in as many years – will revive the company. Although he was open to the idea of a merger in the future, he said that nothing would be done before the end of the year, as he still plans to complete other projects, including the integration of Deutsche Bank's two retail units into the domestic market. He also expects a rebound in the lender's share price, which will help him not to enter the merger negotiations in a weak position.
Deutsche Bank, 48, has stepped up its plan to exit unprofitable companies while controlling its spending. So far, the shareholders had supported it, but their support could fade quickly if it could not halt the decline after a sharp fall of 56% last year. Although Sewing publicly ruled out a merger this year, he privately stated that he would need to rethink his approach as it became apparent that his current plan was not working.
The Deputy Finance Minister and his head, German Finance Minister Olaf Scholz, are among the strongest supporters of a banking merger in the country. They see in the financial crisis ten years ago the proof that Germany needs a powerful lender and wants to act before the next economic downturn. The sense of urgency is one of the reasons why Kukies has held more than a dozen talks with Deutsche Bank executives since taking office last March, with at least some of these meetings addressing the strategic options of the bank.
The views of Scholz and Kukies also matter, as Germany still holds just over 15% of Commerzbank after the 2009 bailout, which means the government will likely have a stake in a merged company, according to familiar people. Such participation could reassure investors in the event of a crisis and leave the door open to the government to participate in a possible capital increase if this was required as a last resort.
The chief executive of Commerzbank said that bank mergers can be a good way to reach the scale. He is also open to merging with Deutsche Bank in particular, although he is a bigger supporter of the idea in 2017, when the market value of Commerzbank has almost doubled, according to people accustomed to his thinking.
Like Sewing, Zielke would like to show that his turnaround plan – unveiled a little over two years ago and focused on capturing market share while reducing costs – is yielding results. But he recently had to admit that some assumptions were too optimistic, forcing him to abandon some of the key targets of the plan. He also met regularly with Sewing recently and the two discussed the merger, among other things although it is not an official agenda item, said people familiar.
The chairman of Deutsche Bank has been instrumental in the lender's strategy since he took office more than six years ago. He also played an important role in the ongoing discussions on a possible merger with Commerzbank, after discussing this idea with the German government last year, said people familiar with the discussions.
This does not necessarily mean that Achleiter is in favor of this idea. As the bank's main liaison with major investors, he is particularly sensitive to the bank's shares, which have lost about 70% of their value since taking office. This decline in credibility means he is eager to see a rebound before the end of his term in 2022 and ideally before the bank's 150th birthday in 2020, according to people who know him well.
BaFin, the head of Germany's leading banking supervisor, is unsurprisingly cautious about a merger. He does not consider mergers and acquisitions as an easy fix for big banks in general, let alone when it comes to lenders that he perceives as weakened, according to people familiar with his thought. Despite his reservations, he admitted that banking transactions would probably be concluded and that he would be more open to a rapprochement between Deutsche Bank and Commerzbank if these two countries could improve their lot, said the citizens.
The story continues
Hufeld is not the only regulator of Deutsche Bank, but its position in the supervisory group of the European Central Bank is strengthening its voice. Some of his colleagues are generally more optimistic about mergers. Sabine Lautenschlaeger, a member of the ECB Executive Board, recently described the talks on the consolidation of German banks as a "very positive idea".
Most of Deutsche Bank's largest investors agree with the CEO that a merger at the current price of the stock would preserve its low value. However, the co-CEO of Cerberus Capital Management LP is no longer involved because his company is also a major shareholder of Commerzbank, holding 5% of the second largest publicly traded bank in Germany. The fact that Cerberus has interests in both companies means that the low price of Deutsche Bank shares would not dilute the equity stake of the private equity firm in a merged entity as much as for other investors in Deutsche Bank.
The influence of Cerberus is reinforced by two other factors: it has invested in many other banks, regularly bringing the company into contact with German politicians and regulators, and its advisory branch has a consultancy mandate with the Deutsche Bank which guarantees unprecedented access to decision-makers. Although the private equity firm can support a merger if it improves the prospects of both banks, it is not currently seeking an agreement, saying that Germany is big enough to have two large lenders, according to people aware of the file.
To contact the reporters on this story: Steven Arons in Frankfurt at sarons@More Bank.net; Birgit Jennen in Berlin at bjennen1@More Bank.net; Nicholas Comfort in Frankfurt at ncomfort1@More Bank.net
To contact the editors responsible for this story: Dale Crofts at dcrofts@More Bank.net, Andrew Blackman
For more articles like this, go to More Bank.com
© 2019 More Bank L.P.