Deutsche Bank and Royal Bank of Scotland continue their zombie bank march

by Shaun Richards

We find ourselves in yet another version of banking Monday and let me immediately note an issue highlighted by moves at the UK’s main zombie bank which is Royal Bank of Scotland or RBS. From the BBC.

A UK payment processing firm that used to be owned by Royal Bank of Scotland has been sold in a deal worth $43bn (£32bn).
WorldPay has been bought by Florida-based Fidelity National Information Services (FIS) for $35bn in cash and shares, plus WorldPay’s debt.

FIS chief executive Gary Norcross said “scale matters in our rapidly changing industry”.

WorldPay was sold by RBS as a condition of the bank’s financial crisis bailout.

The value of the FIS purchase means Worldpay is worth about £8bn more than RBS.

Some perspective is provided by the way WorldPay is worth much more than RBS. It also means that if it has kept it UK taxpayers would have done a lot better as we see yet another shambles delivered by our political establishment.

This is from Finextra in August 2010.

RBS was told to sell off WorldPay – or Global Merchant Services – by the European competition authorities last year as a condition for joining the UK government’s asset protection scheme.

Meaning RBS got this.

Royal Bank of Scotland has inked a deal to sell just over 80% of its WorldPay payments processing unit to private equity firms Bain Capital and Advent International.

The agreement is for an enterprise value of up to £2.025 billion including a £200 million contingent consideration, with RBS keeping a 19.99% stake in the business.

As you can see whilst money was earnt at the time it was much, much less than would have been received today. Oh and the remaining part was sold in 2013. Seems inevitable really doesn’t it? We will never fully know whether the private equity owners of WorldPay drove it forwards or just surfed the wave nor whether RBS ownership would have held it back or worse. But we can see that as the UK and European establishment’s mixed the one part of the RBS business that has charged ahead and would have made a return for taxpayers was flogged off and the loss making dregs were kept. Also we know from experience that it will be nobody’s fault and could not possibly have been foreseen ( makes you wonder why anyone bought it…).

Deutsche Bank and Commerzbank

Reuters was on the case yesterday and they opening with something breathtaking.

Deutsche, the largest bank in Germany, Europe’s biggest economy, emerged unscathed from the financial crash but later lost its footing.

Really? So the share price fall from 94 Euros to 24 Euros in eighteen months was a sort of unfortunate piece of timing! Or maybe not.

Deutsche and other European banks have taken longer to recover from the financial crisis, losing ground to stronger rivals from the United States.

Anyway as we expected last week the story continues to gain momentum.

Berlin wants a reliable national banking champion to support its export-led economy, known for cars and machine tools.

Deutsche Bank is hardly a champion and has been the opposite of reliable unless you are counting unexpected losses. But here is the Sunday news.

Deutsche Bank and Commerzbank confirmed on Sunday they were in talks about a merger, prompting labour union concerns about possible job losses and questions from analysts about the merits of a combination.

Germany’s two largest banks issued short statements after separate meetings of their management boards, a person with knowledge of the matter said, indicating a quickening of pace in the merger process, although both also warned that a deal was far from certain.

The choice of Commerzbank reminds me of the bit in the film Zulu when the Colour Sargeant Bourne answers the question why?

Because we are here lad. There’s nobody else, just us

Or as Reuters put it.

Other than Deutsche, Commerzbank is Germany’s only remaining big bank, after a series of mergers.

You would have thought that a series of mergers would have created other big banks as we already see signs of past trouble. Still why stop a plan which is performing badly? Also Commerzbank has its own issues.

Commerzbank, like Deutsche, has struggled to rebound, and German officials say it is vulnerable to a foreign takeover. If an international rival snapped it up, that would increase competition for Deutsche on its home turf.

Berlin also wants to keep Commerzbank’s speciality – the funding of medium-sized companies, the backbone of the economy – in German hands.

Problems

On the 11th I pointed out I was dubious about large losses in bond markets. But it would appear that the people we are regularly told are highly talented and worth large bonuses continue to do things like this.

Commerzbank, for example, has about 30.8 billion euros of debt securities such as Italian bonds that now have a value of 27.7 billion euros – a drop of 3.1 billion euros. A tie-up could crystallise this loss. Deutsche has such securities at market value in its accounts.

To make a loss in bond markets when they in general have seen surges and what the Black Eyed Peas would call “Boom!Boom! Boom!” is something else to look into. Also the government is caught in something of a spider’s web from it past actions concerning Commerzbank.

The government holds a 15 percent stake after bailing it out during the crisis, giving it an important voice.

If we move to the statement from Christian Sewing the CEO of Deutsche Bank we are left wondering “economic sense” for who?

What is also important to me is that we will only pursue options that make economic sense, building on the progress we made in 2018.

Comment

We are seeing ever more consequences of the zombie bank culture. In the UK the RBS saga has reminded us today that the rhetoric of the bailout which claimed that taxpayers would get their money back put a smokescreen over the reality that it involved selling what has turned out to be the most profitable part of it. That echoes as we note a bank worth less than half of what was poured into it. The “privatistaion of profits and socilaisation of losses” them gets turned up to 11 one more time.

Moving to the Deutsche Bank merger with Commerzbank let me open with the obvious issue that solving the Too Big To Fail or TBTF issue is not going to be done by making it even larger. They did manage a cosmetic name change to  G-Sifs or Globally Significant banks but that is it. Also arrows will be flying in the direction of Mario Draghi and the ECB about how its negative interest-rate policy has helped trap the banks in the zombie zone. They get help ( TLTRO is coming) in a liquidity sense but not in a solvency sense.

Also we are told the banks support the economy and yet this keeps turning up.

 A merger with Commerzbank would face opposition from unions, which expect as many as 30,000 jobs to be lost. And the combined bank would probably lose some business from German companies keen to diversify their sources of funding. ( Reuters)

For it to work we need plenty of smoke and mirrors as @jeuasommenulle points out.

Finally, an “amusing” one for the geeks: a very large part of the financials of the deal rely on the regulatory treatment of the negative goodwill the deal would generate (we’re possibly talking of 15-20bn€!)…….Positive goodwill is deducted from CET1, but negative isn’t – which does not make any sense if you ask me. Why is that ? Because when the CRR was drafted nobody thought of that so the wording is vague.

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