Deutsche Bank Commerzbank Merger

Basel5's picture
Rank: Baboon | 120

I am wondering to what extend this deal could make sense. What I thought about was the following

Upsides

  • Cutting down non-interest expenses (especially labor)
  • Cross selling of products. Only in investment banking?
  • Maintaining a "national champion" in Germany. Almost EU 2tn in assets
  • Make the combined bank competitive again in a "overbanked" landscape
  • New "chance" to reinvent itself (not really an argument)

Risks and drawbacks

  • Massive opposition by labor unions (merger would lead to reduction in personnel)
  • Integration costs (EU 4bn according to FT)
  • FV adjustment of sovereign debt of CoBa leading to one-time losses of EU 4bn
  • DB's exposure to level 3 assets (illiquid derivatives)
  • Opposition of some shareholders and likely dilution of CoBa share price (creation of badwill)
  • Increased capital requirements only due to increased size (T1 capital)
  • Questionable legal structure. Heard of plan to create a holding (1) DB investment banking (2) Retail and corp banking of DB + CoBa
  • A combined bank would lose clients due to bank diversification of the clients (mandatory?)
  • A merger would be the complete opposite of the downsizing strategy proposed by DB's new management

Btw: Commerzbank hired GS and Rothschild, DB hired an ex-Centerview FIG-banker and works with Citi according to the Financial Times.

Is this all just happening for political reasons and pressure from Cerberus? Here, I see many risks and very limited return potential (especially for shareholders).

Does anyone of you have any insights why this is happening (maybe also some FIG bankers)?

Comments (13)

Mar 20, 2019

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Mar 20, 2019

More importantly for this forum, the merger represents a once-in-a-generation opportunity for the banks to restructure and reinvent themselves. In other words, it gives DB a unique mandate to embark on more radical cuts to its investment bank.

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Most Helpful
Mar 20, 2019

From my understand, which could most definitely be off, the main drivers are to stabilize the German Commercial Lending Market, and as to one of your points to be more "competitive" in the Euro Bank Market.
The German government is pushing this due to their stake in Commerzbank, it offers a chance to re-brand DB's reputation, and they want to ensure that the German corporate economy can receive loans from a home town favorite.
Though I agree with OP the risks are high and I don't truly believe that the merger solves any of either of the banks individual underlying problems.

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Mar 25, 2019

Downsides:
-both banks are shit. The bigger an organization is, the harder it is to reform. Making it bigger won't make two shits great.
-the merger is political, not economic/financial; it's Merkel's typical ''kick the can down the road and hope for the best''; that's how she dealt with crises for the past 20 years. The merged bank will crash later on, making a bigger crater.
-incoherent strategy will keep people away; DB was downsizing, now it's doubling it's size? Brilliant.

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Mar 25, 2019

Agree with this. "National Champion" is a euphemism for "Utility."

In general, if a merger (or any strategic decision) is spurred by lawmakers it is probably going to be bad for shareholders. If this deal does go through, the instant it closes the German government is going to throw its weight entirely behind a) the unions fighting any job cuts, and b) German borrowers wanting preferential treatment because they're German.

Mar 25, 2019

What does this mean for incoming analysts and summer analysts in their CIB?

Mar 26, 2019

if they put all analysts (CoBa + DB) in one pool: shorter hours (CoBa avg 50h) and probably also less pay and small (or no) bonuses since someone must pay for the deal

Funniest
Mar 25, 2019

Tadhg Flood was the Head of FIG at DB and left last year for CVP, now he's running their deal.

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Mar 26, 2019

I imagine one of the biggest upsides would be synergy savings with banks this size. But what I've learned after talking to some fig bankers is that they rarely ever materialize to the extent expected because of social and political pressure which for a merger this connected to politics would be interesting.

I think the biggest upside would be providing stabilization to the German economy and in turn removing a potential ignition for a near term global recession.

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Mar 26, 2019

I would imagine they would create a "bad bank" similar to Barclays though and try to clean up the junk a bit. Would be interesting to hear from any FIG bankers what their thoughts are.

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Mar 26, 2019

A few years ago, DB already created a "bad bank" where its mandate was to wind down certain underperforming and/or illiquid assets.

Mar 27, 2019

I am planning to join the Structured Credit Team on one of the asia desks. Would appreciate any advice on this decision as i'm graduating in a few weeks time and am worried about my career prospects

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Mar 27, 2019
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