Deutsche Bank Seeking a “Guarantee of Existence” with Monster-Merger?

Opposition Is Growing to Merger Between Deutsche Bank and Commerzbank.

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

The chief executive of eternally troubled Too-Big-To-Fail Deutsche Bank, Christian Sewing, believes the time is ripe for a merger with its national rival, Commerzbank, combing Germany’s two biggest, most dangerous lenders. So, too does his counterpart at Commerzbank, as does US private equity firm Cerberus, which owns 3% of Deutsche Bank and 5% of Commerzbank.

Germany’s Finance Minister and card-carrying social democrat Olaf Scholz is also firmly on board. Indeed, many say that he’s the one leading the charge despite the tens of thousands of job losses a merger between the two banks is guaranteed to produce. Scholz’s deputy, Joerg Kukies, has courted controversy for his previous role as co-chief executive of Goldman Sachs AG, which is reportedly advising Commerzbank on the proposed $28 billion tie-up. But Kukies insists there are no conflicts of interest, which is a relief.

For some time now, the German government has been exploring ways to lever a merger between the top two banks to add scale and slash expenses. As things currently stand, Deutsche Bank shows little sign of halting, let alone reversing, the “vicious cycle of declining revenues, sticky expenses, lowered ratings and rising funding costs” that the group’s CFO James von Motke sayshas been plaguing it. Whether lumping it together with a bank that has already been bailed out once in “a merger of weakquals,” as London-based brokerage Olivetree calls it, will help right the ship is highly debatable.

But right now, the big concern is that time is fast running out for one of Europe’s biggest and most hyper-connected lenders. Unless something drastic is done soon, the next downturn could prove fatal for an already gravely weakened Deutsche Bank whose stock has been in a death-spiral since 2007, having lost over 90% of its value, and whose price-to-book ratio — the equation often used to reflect the value that market participants attach to a company’s equity — is currently below 0.25%.

Normally, when a company’s P/B ratio falls below 1, it means the market is either undervaluing it and thus it could be good value, or the company is in trouble. When the ratio slumps as low as 0.22%, as is the case with Deutsche Bank, it’s far more likely to be the latter than the former. Hence all the frantic merger talk.

But opposition to the deal is building. On Wednesday, the Financial Times reported that union bosses representing Deutsche Bank workers have threatened to scupper the integration of Postbank, which Deutsche Bank bought nearly a decade ago but still hasn’t fully ingested, if the merger talks continue. Worker representatives make up half the supervisory boards of both banks and have unanimously rejected the proposed tie-up.

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It’s not just the banks’ workers who are worried about the merger. So, too, are Deutsche Bank’s all-important Qatari shareholders, who fear their already beaten-down holdings will get further diluted. The five economists of Germany’s highly regarded Council of Economic Experts, which advises the federal government on economic matters and is often referred to as “The Five Sages”, have also expressed deep reservations about the planned merger. At a recent press conference Isabel Schnabel warned of the risks the merger could pose to German taxpayers:

“After a merger of this kind, it is perfectly clear that a bank like this will never sink. I would clearly discourage the creation of an even bigger national champion… I think it’s a very bad idea in every way.”

The German state already holds a 15% stake in Commerzbank, as a result of bailing out the lender following its suicidal €9 billion acquisition of Dresdner Bank just before the last crisis. If the merger with Deutsche Bank went ahead, German taxpayers would hold around 5% of the newly formed frankenbank, which, as DW business editor Henrik Böhme warns, “could easily be construed as a guarantee of existence.”

And that is probably the main point of the merger: to open the door to ongoing, never-ending state support of the country’s two biggest financial institutions, while also ensuring that no rival European banking giant, such as BNP Paribas, gets its hands on the assets of Deutsche Bank, Germany’s one and only global systemically important bank.

But whatever the motives behind the plan, the five sages’ unanimous opposition to it could prove to be a major obstacle. “The two institutions would have to determine for themselves if a merger would make economic sense, but if this were to be organized with state aid, we would have to be very skeptical,” said Lars Feld.

Even senior members of the European Central Bank (ECB), which has long lobbied for greater concentration in Europe’s ailing banking sector, are expressing big doubts about the tie-up. “I don’t particularly like the idea of national champions or European champions,” said Andrea Enria, the new head of the ECB’s supervision board, adding that the job of a banking supervisor shouldn’t include promoting any particular structural outcome.

Whether the ECB agrees with Enria is not yet clear. Representatives of the bank, including Enria’s predecessor, Daniele Nouy, have repeatedly called for the creation of “European champions” to compete with their much larger US rivals. But there are no guarantees that a tie up of Deutsche Bank and Commerzbank will result in such an outcome, while the risks to German taxpayers and the wider financial system of creating an even bigger frankenbank could not be greater. By Don Quijones.


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