Deutsche goes back to a cold, dark place

Deutsche Bank AG’s decision to abandon an attempted takeover of Commerzbank AG makes sense, but it still leaves both sides scrambling for alternative solutions to the same problem of pathetic returns.
After weeks of deliberations, the German behemoth concluded the benefits would not have offset the “additional execution risks, restructuring costs and capital requirements.”
The rationale is hardly a surprise. As we’ve argued from the outset, the costly and risky combination wouldn’t addressed the broader structural inefficiencies in German banking, while leaving enlarged group still exposed to Deutsche’s trading activities and sub-par profitability.
After multiple attempts at a reboot in recent years, Deutsche Bank will probably need to do the next stage of the restructuring on its own. For smaller Commerzbank, the option of a deal with another European lender may become more likely. A few have already been knocking.
The logic of the transaction was also its main obstacle: The fusion of two domestic firms offered the prospect of considerable savings, and the deal would have effectively created capital by crystallising a Commerzbank valuation at a considerable discount to its book value.
But while this promised to improve the merged company’s earnings power five years hence, the operation might well have killed the patient in the meantime. The challenge of integrating the two complex financial institutions would have been a huge test for the newish Deutsche chief executive Christian Sewing. The combined balance sheet would have been worth almost 2 trillion euros. That will have made its chief regulator, the ECB, nervous.
The hefty job cuts involved – estimated as high as 30,000 – added to the risk. While Germany may have full employment, and job losses in finance may attract less sympathy than other industries. the deal couldn’t work without unions on board and they were vigorously opposed at both banks.
Deutsche must now revert to its standalone strategy. It will be a long slog. The bank has an enduring cost problem. Cutting back its equities operation and its US activities to create a business more focused on Europe may be a start. But that will be expensive and might require yet more capital from investors.
Rumoured interest from foreign buyers was a factor in pushing Deutsche, egged on by Berlin, into talks in the first place. BNP Paribas, UniCredit SpA and ING Groep NV are the obvious candidates. Commerzbank CEO Martin Zielke said doing nothing isn’t an option, which leaves open the option of more domestic consolidation too.
UniCredit’s ownership of Germany’s HypoVereinsbank should give it an advantage. That offers scope for domestic synergies and creative structuring. A deal could be structured as a share swap with Italian bank receiving stock in a combined HVB-Commerzbank, leaving German state, which owns 15 percent of Commerzbank, invested in an enhanced Frankfurt-listed, Germany-focused lender.
But it would be wrong to rule out other foreign buyers, whose limited geographical overlap would make the path to trade union assent easier.
—Bloomberg