Deutsche Bank AG and Commerzbank AG have finally confirmed merger talks. In a sparsely-worded regulatory filing on March 17, Deutsche Bank said it’s “engaging” in talks with its cross-town rival as it seeks to boost growth and profitability. The banks gave no indication on how a deal would be structured or financed and said it may not happen at all.
The talks raise plenty of questions. Estimates of how much capital Deutsche Bank would have to raise to acquire Commerzbank vary widely. Then there’s the issue of whether the banks would be forced to sell some of their best-performing businesses. Allianz SE is already said to be exploring the possibility of a combination of its asset management arm with Deutsche Bank’s DWS asset management unit, though that could be wishful thinking.
Investment bankers will also be watching closely for any sign of a retreat from New York, London or Hong Kong. Deutsche Bank Chief Executive Officer Christian Sewing has repeatedly ruled out a withdrawal from the U.S., which is home to the world’s deepest capital markets, and said in a letter to employees on March 17 that—talks notwithstanding—the bank continues to target a leading position in Germany and Europe, with a global network.
Pooling the assets of Deutsche Bank and Commerzbank would make the combined firm Europe’s fourth-largest lender with a 1.81 trillion-euro ($2.05 trillion) balance sheet, based on data from the end of December. Deutsche Bank’s retrenchment meant it lost that spot to Spain’s Banco Santander SA last year.
Deutsche Bank’s revenue has declined for three years running , with no end in sight. Adding Commerzbank’s earnings to the mix could take Deutsche Bank’s revenue to slightly above its 2012 peak of 33.7 billion euros, assuming clients stick around and the lenders don’t sell assets.
The banks would face upfront costs to combine their operations and fire staff, but the resulting savings could reduce their annual expenses by more than 2.2 billion euros over the longer term, according to the average of four analyst estimates compiled by Bloomberg. That’s still just a small fraction of their overall expenses.
Together, Deutsche Bank and Commerzbank employ about 140,000 people, more than half of whom are located in Germany. Eliminating a large chunk of those jobs could substantially reduce the costs of a merged bank. As many as 30,000 positions could be at risk if a deal is reached, people familiar with the matter have said. Deutsche Bank executives are looking for reassurances they’ll get government backing for job cuts as they consider going public with their merger discussions.
While a deal would leave only one German bank with global reach, the combined firm wouldn’t be dominant at home. A merged Deutsche-Commerzbank would control less than 10 percent of German bank branches and would still face competition from savings and cooperative lenders. Those firms aren’t under the same pressure to generate profits and they have ruled the market for retail banking.
By Nicholas Comfort & Steven Arons