CRZBY Commerzbank Ag (PK)

By Patricia Kowsmann 

FRANKFURT -- Despite spending billions of dollars to steady their fortunes and try to remain independent, Deutsche Bank AG and Commerzbank AG are now weighing a merger.

A spell of acute weakness across the sector means a reluctant marriage could be the best result the struggling lenders can hope for. That said, it is still possible -- some observers say even likely -- that no deal happens.

If a deal is reached, it could do more than shore up the banks themselves: The formation of a national banking champion would give much-needed support to Germany's economy when the outlook is bleak.

Here we lay out how the German banking industry and the two banks stack up.

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

The so-called "three-pillar" banking system comprises 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.

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.

A combination of Deutsche Bank and Commerzbank would create the eurozone's second-largest bank by assets, after France's BNP Paribas SA. 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 EU lawmakers Thursday. "It boils down to making sure that the resulting entity is able to comply with the supervisory requirements."

Deutsche Bank and Commerzbank would also 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.

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 25, 2019 05:44 ET (09:44 GMT)

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