By Jenny Strasburg, Patricia Kowsmann and Bojan Pancevski
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 18, 2019).
Deutsche Bank AG and rival Commerzbank AG on Sunday confirmed
they are formally discussing a merger, marking a new phase after
years of speculation about the troubled fates of Germany's two
biggest banks and a stark acknowledgment of the pressures both
lenders face.
Deutsche Bank said the talks are part of a review of "strategic
options." The banks have considered a tie-up for years, under
different chief executives. But previous talks ended before any
formal announcements were made.
A union between the two would be a reluctant marriage. A
succession of management teams has tried to right Deutsche Bank,
once Europe's most aggressive and globally ambitious major bank.
But its performance continues to lag behind competitors and its
share price continues to fall. Combining the banks as they look now
would produce a German lending giant with a roughly $2 trillion
balance sheet and could help address government skepticism about
the health of both.
Both banks have spent billions of dollars restructuring,
overhauling management and cutting staff, and have tried to remain
independent. But both have failed to convince the German government
that they can succeed alone. Years of low interest rates and the
headwinds of Germany's home market -- which lacks the fee-rich
spoils that drive U.S. investment-banking profits -- have weighed
on both lenders.
Many European banks are trading significantly below their book
value, with Deutsche Bank and Commerzbank among the furthest, a
sign investors doubt management can create value and believe the
lenders are hobbled by Europe's sclerotic economy and their own
structural deficiencies.
Bankers speculating about how a deal could look say the bigger
of the two, Deutsche Bank, could combine its retail-banking
business with Commerzbank's to reduce funding costs in Deutsche
Bank's bigger investment bank. Unknowns include whether the banks
would look to sell pieces of certain businesses, or whether
regulators in Europe or the U.S. would push them to do so.
The Wall Street Journal and other media reported earlier this
month that the two lenders' chief executives were speaking about a
potential deal. The German finance ministry stands ready to support
a deal, the Journal reported in January.
German securities laws require companies to disclose publicly
information material to investors about potential deals when talks
reach a certain threshold, such as formal endorsements by senior
bank officials. Deutsche Bank's management board met Sunday morning
to discuss various options for the bank, including a potential
merger with Commerzbank, people close to Deutsche Bank said.
"There is no certainty that any transaction will occur,"
Deutsche Bank said in its statement Sunday. The lender said it is
focused on improving its "growth profile and profitability." The
statement gave no further details aside from confirming Deutsche
Bank is in discussions with Commerzbank.
Analysts have said the German government could end up owning
roughly 5% of a combined bank. Deutsche Bank has long been seen as
having the implicit backing of the German government during
difficult times; a stake in a merged bank would connect the two
more explicitly.
Investors have been skeptical that the payoffs of a merger would
offset the pain, including years of integration work and possible
dilution of shareholders. What's more, European banking regulators
in private discussions about merger speculation have cautioned that
any merged bank would have to adhere to strict stability
guidelines.
Two weakened banks, as regulators and investors view Deutsche
Bank and Commerzbank, face hurdles to combining technology and
managing the costs and headaches of eliminating tens of thousands
of jobs.
Both banks sought assurances from government officials that they
wouldn't stand in the way of massive job cuts in Germany, however
politically painful that might be. Deutsche Bank CEO Christian
Sewing has told people close to the bank that he received such
assurances.
One question investors have is whether a merger will require
fresh capital. It couldn't be determined how any potential deal now
being contemplated could affect the banks' capital needs, or
whether any capital raise would be necessary.
The nonstop speculation about the two banks' plans created such
pressure that Mr. Sewing and other executives have been constantly
drilled by clients and investors wondering whether the bank planned
to seek a deal. Employees, whose bonuses have suffered along with
Deutsche Bank's share price, also have sought to determine what
direction the bank is heading. Mr. Sewing privately has insisted
for months that he is focused on Deutsche Bank's stand-alone
strategy, not a merger.
In a note to employees posted on Deutsche Bank's website, Mr.
Sewing said executives have a responsibility to consider options
like possible mergers. He asked employees to stay focused on
clients, adding that no deal is certain.
"Experience has shown that there may be a lot of potential
economic and technical factors that could hinder or prevent such a
step," Mr. Sewing wrote.
Until recently, Commerzbank had engaged bankers but they told
peers no deal was actively being negotiated. The tone of that
message changed in the past week, suggesting talks were on and
details being hammered out, according to people close to the
Frankfurt-based banks.
The German finance ministry has signaled to the banks that it
supports a deal and stands ready to support tens of thousands of
job cuts the banks say are necessary for a deal to make economic
sense, according to an official close to Finance Minister Olaf
Scholz.
Government officials, particularly in the finance ministry, have
been concerned about the decline of the country's biggest banks,
which has contrasted with rising power among banks in the U.S.,
China and elsewhere. The idea of creating a "European champion" to
compete with stronger foreign institutions in banking and other
industries has fueled the finance ministry's support for a merger,
according to people involved in government discussions.
Commerzbank is 15% owned by the German government after it
received a bailout during the 2008 financial crisis. Since 2016, it
has cut staff and narrowed its focus to deposit-taking and
commercial lending. It has boosted its customer base and loan
volumes to the prized German midsize companies.
But the bank continues to struggle in a highly competitive
German market, home to almost 1,600 banks.
Deutsche Bank, which is far more dependent on trading and
investment-banking businesses, has lost market share in core areas,
ceding business to U.S. banks. Deutsche Bank has struggled with
higher funding costs than many rivals, making profits harder to
come by.
Deutsche Bank executives privately have said that a combined
Commerz-Deutsche Bank would benefit from lower funding costs, using
a bigger pool of retail deposits to its advantage.
Ben Dummett contributed to this article.
Write to Jenny Strasburg at jenny.strasburg@wsj.com, Patricia
Kowsmann at patricia.kowsmann@wsj.com and Bojan Pancevski at
bojan.pancevski@wsj.com
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March 18, 2019 02:47 ET (06:47 GMT)
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