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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 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. | |
But while Germany’s two largest banks answered one question that had preoccupied the country in recent weeks, they raised another: What next? | |
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. | |
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. | |
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 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. | |
“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. | |
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. | |
“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.” |
Labor representatives had opposed the merger because it would have led to an estimated 30,000 job cuts, and applauded the decision Thursday. | |
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 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. | |
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. | |
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. | |
Congress has subpoenaed Deutsche Bank records about its loans to President Trump, another possible source of embarrassment in months to come. | |
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. | |
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. |