Deutsche Bank’s Trading Unit Is Said Key for ECB in Deal Talks

April 8, 2019 Updated: April 9, 2019

Deutsche Bank AG’s troubled trading arm will be a focus of European banking regulators when they decide whether to approve a potential takeover of rival Commerzbank AG, according to people familiar with the matter.

Supervisors at the European Central Bank and national authorities want a clear idea of the degree the combined entity will depend on the securities unit for revenue, said the people, asking not to be identified as the talks are private. The rationale of the deal cannot simply be to use additional retail deposits to finance the investment bank, said one of the people.

Deutsche Bank Chief Executive Officer Christian Sewing and Commerzbank CEO Martin Zielke have been discussing a merger for three weeks. Investment banking is one focus of the talks as Commerzbank is assessing Sewing’s willingness to restructure that unit, people familiar have said. For Deutsche Bank, a deal could help reduce stubbornly high funding costs by expanding the deposit base.

A takeover would mark the biggest test to date for the ECB’s supervisory arm after it started overseeing lenders less than five years ago. That means the ECB will be as stringent as possible to avoid being blamed should a merged entity run into bigger problems down the road, according to the people familiar with the matter.

Approvals are likely to hinge on plans to improve profitability, the people said. The banking watchdogs will be testing the credibility of the two lender’s business plans as well as checking them against expected cost savings and revenue as well as capital buffers, they said.

Officials for the banks and the ECB declined to comment.

Revenue from selling and buying securities at Deutsche Bank has been falling for seven consecutive quarters and the lender has guided for yet another weak period. Elevated funding costs are part of the problem because they make it harder to compete. A tie-up with Commerzbank would expand deposits—a particularly cheap source of funding—and add non-trading business lines to Deutsche Bank’s revenue mix, other people said.

Deutsche Bank would need regulatory approval to use the liquidity added through Commerzbank’s deposits throughout the group. That can help lower costs, for example if it’s invested as cash with the Fed rather than ECB. The lender last year obtained a similar approval for another business that it acquired almost a decade ago, after pledging to cap the amount of retail deposits it would use to support U.S. activities.

Some shareholders have been skeptical about Deutsche Bank’s securities unit, with several large investors asking the bank behind the scenes to continue shrinking the business, especially in the U.S. Among the skeptics is also a top executive at BlackRock Inc., one of the largest investors in both Deutsche Bank and Commerzbank.

“The one thing I’m convinced will not work,” BlackRock Vice Chairman Philipp Hildebrand said recently about a potential deal, “is to try yet again to create this sort of large U.S.-inspired investment bank operation through stealth.”

Top U.S. executives at Deutsche Bank have tried to assuage concerns among employees there, saying in an internal memo on April 5 that the operations have not been part of the discussions with Commerzbank.

Whether the banks will have to raise additional capital, potentially by issuing shares, will depend on the structure of the combination, according to one of the people. Though analysts generally agree that some sort of capital measure is inevitable, there’s a fair chance it may not have to raise any fresh funds at all, one person said.

By Nicholas Comfort & Steven Arons