Potential Deutsche Bank Deal Gains German Government Support

By Jenny Strasburg, Bojan Pancevski and Ben Dummett

The German government is prepared to back a potential merger of Deutsche Bank AG and rival Commerzbank AG to create a national banking giant, responding to deep skepticism among shareholders, clients and others about the health of the two banks.

A senior German regulator told The Wall Street Journal in recent weeks that he had reviewed and unofficially endorsed plans to merge the two banks. He said the initiative was driven by the country's finance minister, Olaf Scholz, and his Social Democratic Party.

"This is a decision about industrial policy and it has to be made by politicians," he said.

The regulator added that Chancellor Angela Merkel's conservatives, who govern as a senior partner in a coalition with Mr. Scholz's Social Democrats, have also accepted the idea of a merger, according to discussions he had with conservative politicians.

A spokeswoman for the conservatives didn't respond to a request for comment. A spokesman for Mr. Scholz didn't respond to a request for comment.

Recently, a person close to Cerberus Capital Management LP, a top investor in both Deutsche Bank and Commerzbank, said executives have indicated it wouldn't stand in the way if Berlin decides it backs a merger. A Cerberus spokesman declined to comment. Cerberus had last year told investors and others that Germany was a big enough market for both banks and it wasn't pushing for a merger.

This growing acceptance within the political establishment and among some investors of a merger means the country's two biggest banks may not fully control their own fates much longer.

Deutsche Bank executives, buffeted on multiple fronts, could be pushed toward the merger, which they've been resisting, before summer, according to investors, government officials and others close to the lender.

Like its bigger rival, Commerzbank has struggled to restructure and make money on a pace to win over investors. Its shares fell 54% last year, compared with Deutsche Bank's 56% decline.

Deutsche Bank Chief Executive Christian Sewing, nine months into the job, has told clients, investors and regulators he wants more time -- ideally the rest of this year -- to fix the bank's cost and profitability problems before seriously contemplating a tie-up. Publicly, he has said he is focused on the bank's long-term, stand-alone strategy. Prominent investors have backed the wait-and-see stance.

Some people involved in contingency planning in Berlin, Frankfurt and elsewhere say Mr. Sewing and his team have the rest of the first quarter to steady the bank's performance and boost confidence among investors who've driven the bank's shares to record lows.

Worries over government investigations in the U.S. and Germany into Deutsche Bank's business have helped send its funding costs higher and created jitters among clients. If progress is lacking, the momentum behind a merger will pick up, they say. They say that's the most likely option for dramatically reshaping Deutsche Bank.

This Friday in Frankfurt, Deutsche Bank is expected to report 2018 results headlined by the lender's first annual posttax profit since 2014.

Executives have said they are on track to meet that goal. Investors, meanwhile, will be looking ahead, especially for clues about underlying 2019 trends in key areas like fixed-income trading and transaction banking. Any sign the bank is caving on its already-modest financial targets -- such as 2019 costs, revenues, or return on equity -- would be unsettling. There's no indication those targets are changing.

Deutsche Bank and Commerzbank have discussed a potential deal periodically over the past three years but without reaching an agreement, people close to the lenders say.

Creating one large German bank out of two ailing ones would dovetail with a government philosophy behind fostering so-called European champions to counter the growing power of U.S. and Chinese institutions, senior government officials said.

The conclusion among top government authorities, the German regulator said, has been that the impact of a big-bank merger on the stability of the German financial system would be manageable. Others caution that thousands of job cuts would be necessary to shed enough costs for a combined Deutsche-Commerzbank to make sense, meaning fights with labor unions.

The government, besides its interest in the stability of the German banking system, owns about 15% of Commerzbank shares as a result of a crisis-era bailout. That stake could give German taxpayers a roughly 5% stake in a combined Deutsche-Commerzbank, analysts and government officials say. Some inside the government believe it could comfortably sell down that stake over time.

One potential investor eyeing a new stake in the bank is Qatari's sovereign-wealth fund, the Qatar Investment Authority, according to a person close to Deutsche Bank. The discussions were earlier reported by Bloomberg. It is unclear what size stake the QIA is considering, which would be in addition to a roughly 6% shareholding by separate Qatari-controlled vehicles. The QIA didn't immediately respond to requests for comment.

Write to Jenny Strasburg at jenny.strasburg@wsj.com, Bojan Pancevski at bojan.pancevski@wsj.com and Ben Dummett at ben.dummett@wsj.com

(END) Dow Jones Newswires

January 31, 2019 07:27 ET (12:27 GMT)

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