German Government Favors Deutsche Bank Merger With Commerzbank

Europe's biggest banks are about to get even bigger.

Just over a week following reports that the biggest German bank had been "encouraged" by both regulators and shareholders to become a holding company to make it "more agile to merge all or parts of itself", Bloomberg reported that Germany’s government would favor a tie-up of troubled Deutsche Bank and Commerzbank to create a national lender "that would reliably finance the country’s export-oriented economy."

The reason why Berlin government is currently leaning toward this approach is to ensure the country has a strong domestic bank to keep funding German companies even during a financial crisis, as foreign investors would likely pull out capital at such a time, exacerbating the crisis.

Contacts between the government and Deutsche Bank have increased since Sewing, a German with deep career roots at Deutsche Bank, took the helm, the people said. The arrivals of Scholz, who took over from Wolfgang Schaeuble in March, and his deputy Joerg Kukies, Goldman Sachs’s former head in Germany, are also said to be helping.

As Bloomberg further adds, "the discussion in Berlin reflects an intensifying search for national banking champions to underpin Europe’s biggest economy and close the gap with foreign rivals. Still, none of the people suggested Chancellor Angela Merkel’s government is prodding for a deal, while Deutsche Bank is said to be wary since it’s still busy integrating its Postbank unit."

However, a merger does not appear to be imminent as Deutsche Bank’s leadership recently ran through various merger scenarios including domestic and European ones at a strategy meeting in mid-September and decided the time isn’t right.

Another hurdle is concern at Deutsche Bank that a Commerzbank tie-up would only lead to more staff cuts, while a European partner might open up bigger strategic possibilities, one of the people said.

As a result of the various options on the table, none of which can be consummated, mean that the banks remain in limbo with their shares under pressure as investors question the viability of their long-term strategies. Meanwhile, both Deutsche Bank and Commerzbank continue to face investor skepticism about their long-term strategy, resulting in the worst stock price performance of European banks. Furthermore, the vulnerability is adding to concern in Berlin about German banks, a crucial provider of credit for the nation’s export-driven economy.

Meanwhile, German Finance Minister Olaf Scholz has been issuing frequent warnings about the state of Germany’s banks along with calls for European policy makers to complete a banking and capital markets union, which would open the door to consolidation in the financial industry.

“We must complete the banking union now so we have instruments and options” in case another financial crisis strikes, Scholz said in a speech on Sept. 14, echoing calls by Deutsche Bank Chief Executive Officer Christian Sewing and European Central Bank President Mario Draghi.

Germany still owns a 15% stake in Commerzbank dating back to the financial crisis a decade ago; as a result Berslin has a direct interest in the future of the country’s second-biggest lender. Though the government says it doesn’t intervene in private-sector decisions, any merger with Deutsche Bank is likely to require at least its tacit approval.

For the finance minister, the lessons from the crisis are clear: strengthen banks when times are good.

In a recent op-ed, he reminded Germans that the federal government put up more than 30 billion euros ($35 billion) to stabilize the financial industry since 2008.

Arguably, he would like to avoid that when the next crisis hits, although it isn't exactly clear how merging two wrongs will make a right.

The shares of both lenders gained after the news, with Deutsche Bank rising about 0.9% and Commerzbank 0.7% higher as of 4:13 p.m. in Frankfurt. Both have posted steep declines this year, with Deutsche Bank having lost about 34%.