ING Groep NV (EU:INGA)
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1 Year : From Nov 2018 to Nov 2019
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 (April 26, 2019).
FRANKFURT -- The collapse of merger talks between Deutsche Bank AG and Commerzbank AG has opened the door to what the German government was trying to avoid in the first place: a foreign takeover of its banks.
Foreign competitors have already started circling Commerzbank, the strongest and simplest to absorb of the two. Italy's UniCredit SpA and Dutch lender ING Groep NV, both with presences in Germany, have informally expressed potential interest in the lender, whose client portfolio of medium-size German companies is highly valued, according to people familiar with the situation.
"I expect Commerzbank will be bought by another European bank, and it's a question of 'when' rather than 'if'," said Filippo Alloatti, a senior credit analyst at Hermes Investment Management.
In a letter sent to the bank's staff, Commerzbank Chief Executive Martin Zielke said it would continue its strategy to focus on clients and invest in digitalization. But referring to the now-defunct merger talks with Deutsche Bank, he added "We want to grow. This also involves reviewing external options."
At least one potential suitor looks to be standing back. Spanish giant Santander SA, which has operations spread out around the world but a small retail presence in Germany, isn't interested in Commerzbank because of eurozone rules that make it difficult to move capital and liquidity across borders, a person familiar with the bank said. Unless a merger generates efficiencies, all Santander would be left with is an unprofitable bank.
Deutsche Bank's bigger size and more complex structure, which includes big trading and investment-banking operations, make it a hard target, analysts said.
Deutsche Bank and Commerzbank had been in formal merger talks since mid-March. Their efforts were spurred by the German finance ministry, which since last year has made public its desire for a national giant to compete with stronger foreign institutions. The German government owns some 15% of Commerzbank, so its position toward any merger is crucial for its success.
Many banks have started exploring tie-ups of operations rather than full-on mergers.
Earlier this month, Santander and France's Credit Agricole SA agreed to combine their custody and asset-servicing operations, creating a EUR3.34 trillion ($3.72 trillion) custodian business with more scale to compete.
Deutsche Bank officials, in parallel with merger talks with Commerzbank, have explored a combination of the bank's asset-management arm, DWS, with UBS Group AG's asset management business. Such a deal would improve the business scale and help both banks gain with efficiencies.
UBS Chief Executive Sergio Ermotti declined to comment on a possible deal Thursday, but in a first-quarter earnings call, he reiterated his belief that consolidation in Europe is inevitable.
"I mentioned already in the past couple of years that consolidation one day or another would be part of the equation in Europe," Mr. Ermotti said.
Behind closed doors, officials at the European Central Bank, which supervises both German banks, have criticized Germany's focus on creating national champions instead of opening up to cross-border mergers that would boost Europe's struggling banking landscape. Many European institutions aren't profitable enough and despite recent efforts to cut costs, continue to be highly inefficient.
"The banking system in Europe is overcrowded," ECB President Mario Draghi said earlier this month. "The need for consolidation is very, very significant."
There are serious roadblocks for that to happen, however.
For one, while many banks have accumulated more capital over the past years, the cushions may still be too low to absorb the high restructuring costs of a combination, according to European bank officials. Talks between the two German banks, for instance, fell apart after it became clear restructuring charges would affect capital ratios in a significant way, while profits wouldn't grow significantly given Germany's crowded and highly competitive banking sector.
Another big problem is that current rules force eurozone banks and their foreign subsidiaries to meet liquidity and capital requirements on a national level. That makes it expensive for banks to have operations spread out. Banks also can't freely shift deposits from one country to another.
According to RBC Capital Markets, a merger between UniCredit and Commerzbank would face the same issue.
"We estimate the potential deal including the capital increase, would result in a 12% [earnings per share] dilution by 2021, which we do not find attractive," RBC Capital Markets said in a note.
--Giovanni Legorano, Ben Dummett and Brian Blackstone contributed to this article.
(END) Dow Jones Newswires
April 26, 2019 02:47 ET (06:47 GMT)
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