Deutsche And Commerzbank Resume Merger Talks

Now that Cerberus Capital (which owns a large slug of Deutsche Bank shares) has joined the German Finance Ministry (a major shareholder in Commerzbank) in pushing for a merger between the two troubled German megabanks, the long-anticipated tie-up - a deal that would spawn a new German "national champion" to combat the creeping influence of JPM and other US investment banks - is looking increasingly likely.

Commerz

According to reports in German newsmagazine Focus, which were cited by Reuters and Bloomberg, the CEOs of both banks, who once sounded apprehensive about the prospect of a merger, have resumed deal talks.

Here's a summary from BBG:

Deutsche Bank Chief Executive Officer Christian Sewing has been in intense talks with Commerzbank CEO Martin Zielke for some days, after receiving a mandate from their management and supervisory boards, according to Focus.

The idea of a merger between Germany’s two biggest banks has been pushed by German Finance Minister Olaf Scholz as a way of creating a "national champion" to serve the backbone of the country’s export economy.

In September, Sewing said his bank was open to a merger, but only once it boosts its profitability over the following 18 months. The lender’s ability to avoid a merger with Commerzbank could rest on its performance in the first quarter of 2019, Bloomberg reported in January.

Given that two wrongs don't make a right, and combining two struggling banks won't automatically produce a success, some may wonder: what's the logic behind a merger? Well, the FT went over this in detail earlier this week in a deep-dive on the German government's long-running campaign to coax the two banks to merge.

DB and Commerzbank both large their peers in key metrics like price to book and return on equity. But a combined bank would not only allow for synergies (i.e. massive job cuts), it would also strengthen their core capital, enabling a combined bank to take more risk, and possibly produce a higher ROE.

DB

But as the WSJ revealed last month, there are some serious cultural barriers to this approach. The biggest among them being that DB traders can't trade their way out of a paper bag. This could be one reason why the bank's trading desks have resorted to market manipulation - as the many 'cartel' prosecutions have illustrated - to goose their profits.