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Germany’s Troubled Banking Giants Decide Against a Merger Germany’s Troubled Banking Giants Decide Against a Merger
(about 5 hours later)
FRANKFURT — Deutsche Bank and Commerzbank, Germany’s two largest banks, called off widely criticized merger talks on Thursday, saying that they had concluded the risks of combining outweighed the benefits. FRANKFURT — Deutsche Bank and Commerzbank abruptly called off their merger talks Thursday, saying they concluded that the perils of trying to forge a megabank with international clout outweighed the potential benefits.
Shares of Deutsche Bank rose as much as 4 percent on Thursday as investors registered their relief that Germany’s largest lender had not pursued a deal that analysts said would have only aggravated its problems. Commerzbank shares fell about 2 percent. But while Germany’s two largest banks answered one question that had preoccupied the country in recent weeks, they raised another: What next?
But the collapse of negotiations means that Germany’s banks must find another solution to a long list of urgent problems, including meager profitability, excessive labor costs and a shift to online banking that they have been slower than competitors to embrace. The status quo is not an option for either Frankfurt bank. Both suffer from urgent problems that include meager profitability, excessive labor costs and a shift to online banking that they have been slower to embrace than their competitors.
The banks appeared to have come to the same conclusion as many critics of a potential merger, who pointed to the poor track record of past German bank mergers and the likelihood that regulators would require the banks to raise more capital. Investors who have been burned by the two banks’ slumping shares may well have balked at staking any more money for a merger. Europe has too many banks for too few customers, and marginally profitable lenders are a source of economic weakness. For all its flaws, the failed quest to merge Deutsche Bank and Commerzbank was an attempt to attack that fundamental problem.
Merging the two banks “would not have created sufficient benefits to offset the additional execution risks, restructuring costs and capital requirements associated with such a large-scale integration,” Deutsche Bank and Commerzbank said in identical statements. Also unresolved is the fear of Wall Street dominance that drove the German government to encourage a merger in the first place. Deutsche Bank’s international stature has declined in recent years after a series of scandals and pressure from regulators to cut back on risky investment banking.
The decision ends a courtship that officially began in March, when the two banks said they would discuss combining to form Europe’s third-largest lender, with assets of $2 trillion. The concern in Berlin is that foreign lenders will retreat to the safety of their home markets if there is another financial crisis, leaving German exporters scrounging for the credit they need to do business abroad.
The talks took place with encouragement from the German government, which was seen as trying to create a national champion that could compete with Wall Street and also be more loyal to German customers in a crisis than a foreign owned bank. “Germany’s globally active companies need competitive financial institutions that can support them around the world,” Olaf Scholz, the German finance minister, who was considered a behind-the-scenes cheerleader for the deal, said in a statement on Thursday after the talks broke down.
[Read more about the merger talks that roiled emotions throughout Germany.] Analysts expect another European bank, such as ING Group of the Netherlands or UniCredit of Italy, to approach Commerzbank now that Deutsche Bank is out of the picture.
But the potential deal faced opposition from unions that represent bank workers and shareholders. It also was criticized by many financial experts and opposition politicians who said it made no sense to combine two lenders with profitability problems and depressed stock prices. “I would expect, in the case of Commerzbank, for other banks to show up rather soon,” said Jörg Rocholl, a banking expert who is president of the European School of Management and Technology in Berlin. “In fact, this could make sense.”
Top executives of Deutsche Bank and Commerzbank decided Thursday morning to end the merger talks after nearly six weeks of intense discussions. Among the obstacles to a deal were Commerzbank’s 8.4 billion euro ($9.4 billion) portfolio of risky Italian government debt and the likelihood that the European Central Bank and other regulators would require a combined bank to raise capital from reluctant investors.
Representatives of the two banks were confident they could overcome these problems, but in the end decided that the overall effort would be too much to pull off.
Merging the two banks, which between them have 140,000 employees worldwide, “would not have created sufficient benefits to offset the additional execution risks, restructuring costs and capital requirements associated with such a large-scale integration,” Christian Sewing, the chief executive of Deutsche Bank, said in a statement. Martin Zielke, the chief executive of Commerzbank, issued an identical statement.
Shares of Deutsche Bank rose as much as 4 percent on Thursday as investors initially endorsed the decision, but later gave up the gains and closed down 2 percent in Frankfurt trading. Commerzbank shares closed almost 3 percent lower.
The banks appeared to come to the same conclusion reached by many critics of a potential merger, who pointed to the poor track record of past German bank mergers, including Commerzbank’s acquisition of Dresdner Bank and Deutsche Bank’s acquisition of Postbank.
“All reasonable people are breathing a sigh of relief,” Lisa Paus, who speaks for Germany’s Green Party on finance issues, said in a statement. “No one could ever explain why an even bigger risky bank made sense.”“All reasonable people are breathing a sigh of relief,” Lisa Paus, who speaks for Germany’s Green Party on finance issues, said in a statement. “No one could ever explain why an even bigger risky bank made sense.”
Regulators, including the European Central Bank, had also scrutinized the proposed deal closely. They were expected to set conditions that would have made a merger unworkable, for example insisting that the banks raise more capital than investors would have been willing to provide. Labor representatives had opposed the merger because it would have led to an estimated 30,000 job cuts, and applauded the decision Thursday.
The end of the merger talks could open the door for a foreign bank to acquire Commerzbank. Mario Draghi, the president of the European Central Bank, has spoken in favor of cross-border deals, saying they help make banks less vulnerable to the economic ups and downs of one country. A deal “would have cost tens of thousand of jobs,” Frank Bsirske, chairman of the union known as Ver.di, which represents workers at both banks, said in a statement. The decision to end talks, he said, “confirms our analysis that such a step would not have created enough value added.”
But Commerzbank’s sale to a foreign competitor such as ING Group of the Netherlands or UniCredit of Italy would be a blow to German pride, and it is unclear if the government, which owns 15 percent of Commerzbank shares, would allow such a sale. But deep job cuts are probably inevitable anyway. Both Commerzbank and Deutsche Bank are very inefficient compared with European rivals, with costs that are too high in relation to revenue.
With the collapse of negotiations, each bank must now face its formidable problems alone. Both Commerzbank and Deutsche Bank are very inefficient compared with European rivals, with costs that are too high in relation to revenue. According to the banks’ data, a German worker at ING, a Dutch bank with a large presence in the country and an emphasis on online services, is more than twice as productive as a comparable employee at Deutsche Bank’s Postbank unit, measured by the number of consumers each is able to serve.
Both suffer from a lack of profitable business areas, and Deutsche Bank is still dealing with the damage to its reputation from multiple scandals since the 2008 financial crisis. Most recently, the bank has come under fire for its role as a conduit for dirty money that flowed through the Baltic branches of Danske Bank, a Danish lender embroiled in a money-laundering scandal. Commerzbank and Deutsche Bank both suffer from a lack of profitable business areas, while Deutsche Bank is still dealing with the damage to its reputation from multiple scandals since the 2008 financial crisis. Most recently, the bank has come under fire for its role as a conduit for dirty money that flowed through the Baltic branches of Danske Bank, a Danish lender embroiled in a money-laundering scandal.
Commerzbank has had its share of problems, including a large portfolio of toxic assets, but was not involved in as much wrongdoing as Deutsche Bank. Commerzbank has made more progress cutting costs. Congress has subpoenaed Deutsche Bank records about its loans to President Trump, another possible source of embarrassment in months to come.
Collapse of the talks is also a setback for Olaf Scholz, the German finance minister, who was seen as a pushing for a merger behind the scenes. Commerzbank has had its share of problems, including a large portfolio of toxic assets, but not to the same extent as Deutsche Bank. Commerzbank has made more progress cutting costs.
“Germany’s globally active companies need competitive financial institutions that can support them around the world,” Mr. Scholz said in a statement on Thursday. He added, though, that cooperation between Commerzbank and Deutsche Bank would “only make sense if it adds up from a business point of view, and moves toward creation of a resilient business model.” The collapse of the talks was seen as a setback for Mr. Scholz, the finance minister. But he accepted the decision Thursday and said a merger would “only make sense if it adds up from a business point of view, and moves toward creation of a resilient business model.”
Unlike Commerzbank, Deutsche Bank is not seen as a target for a foreign buyer because of its complexity and significant problems. It is now up to Mr. Sewing, the chief executive for barely a year, to show that the bank can stand alone.
Deutsche Bank issued preliminary first-quarter profit figures Thursday that offered some reassurance. Net profit rose 67 percent from a year earlier, to €200 million. However, revenue fell 9 percent to €6.4 billion.