CRZBY Commerzbank Ag (PK)

By Patricia Kowsmann 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (March 26, 2019).

FRANKFURT -- The idea behind merging two of Europe's weakest financial institutions -- Deutsche Bank and Commerzbank -- is that together, they can somehow lean on each other and steady their fortunes.

Formal talks are continuing and there is no guarantee a deal will happen. But a look at the numbers shows both the urgency and the difficulty of the task.

Home Market Blues

Germany's banking market is fragmented. At nearly 1,600, the country has more banks than the U.K., France, Italy and Spain combined.

The banking system comprises three so-called pillars: about 200 commercial banks, including Deutsche Bank and Commerzbank, some 400 state-owned local savings banks and more than 900 cooperative banks owned by their 18 million account holders -- one in four Germans. As a result, Deutsche Bank and Commerzbank each have a small market share in domestic lending.

Elusive Profits

The stiff competition has added to pressure on the banks' profitability.

Both banks are among the least profitable in the eurozone. Commerzbank's return on tangible equity, a key measure of profitability, is only slightly higher than that of beleaguered Italian bank Monte dei Paschi di Siena SpA. Deutsche Bank's is sharply lower.

Unlike Commerzbank, Deutsche Bank has a big investment-banking business, which has been hit by volatility and has lost market share to healthier U.S. competitors.

Sizing Things Up

A combination of Deutsche Bank and Commerzbank would create the eurozone's second-largest bank by assets, after France's BNP Paribas SA.

Size is a driver in itself with the German government looking to create a national banking champion.

Their market share on domestic lending and deposits would rise to between 10% and 15%, according to Fitch Ratings.

Deutsche Bank, whose funding costs have increased on low investor confidence in its business, would also benefit from Commerzbank's additional pool of retail deposits and cheaper funding.

But skepticism about the benefits of the merger is widespread. "In our view, a combination of these two low return-on-equity generating banks is unlikely to lead to improvement in earnings in the short term, leading to a bigger balance sheet [and] higher capital requirements," JPMorgan said in a recent note.

Just how much fresh capital the European Central Bank, which supervises both lenders, would require to sustain such a big bank is still unknown and will largely depend on what kind of bank were created from any merger.

"If a merger is put forward to us, our sole focus is to access the viability and the sustainability of the project," ECB banking chief Andrea Enria told European Union lawmakers Thursday. "It boils down to making sure that the resulting entity is able to comply with the supervisory requirements."

What Do Shareholders Think?

Deutsche Bank and Commerzbank would have to convince their shareholders that a tie-up, which would likely dilute their holdings, would be good for them.

While Commerzbank has the blessing of its largest shareholder -- the German government -- Deutsche Bank must deal with Chinese conglomerate HNA Group Co., which owns 6.3% of the bank, and the Qatari royal family, which has a 6.1% stake through separate Qatari-controlled vehicles.

Cerberus Capital Management LP, a top investor in both Deutsche Bank and Commerzbank, has signaled it won't stand in the way of a deal, according to a person familiar with the firm. BlackRock, which also has stakes in both banks, is generally skeptical about the benefits of combining the two banks, but like other investors wants details of how a deal would look before making any decision, according to a person briefed on the matter. Both have seen the value of their stocks fall sharply overtime.

Jobs Matter

A vocal objector to a deal is services-sector labor union Verdi, which has representatives in the supervisory board of both banks and said up to 30,000 out of roughly 140,000 positions could disappear under the merger.

"We reject a possible merger of both houses with a view to endangering tens of thousands of jobs," said Jan Duscheck, a Verdi representative.

While Berlin has signaled it would back job cuts, analysts are skeptical that the banks will be able to deliver a leaner company quickly. Germany's labor rules are notoriously stringent, making layoffs difficult and costly. Both Deutsche Bank and Commerzbank have struggled to absorb other banks they have bought in the past.

Write to Patricia Kowsmann at patricia.kowsmann@wsj.com

(END) Dow Jones Newswires

March 26, 2019 02:47 ET (06:47 GMT)

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