(Bloomberg Opinion) -- Beware of the lipstick on this pig. The merger of two of Europe’s biggest lenders is a desperate government-orchestrated attempt to salvage what’s left from the wreckage caused by years of failed global ambitions, costly scandals, and policy failings at home.
On Sunday, Deutsche Bank AG confirmed it is in talks with German rival Commerzbank AG. That both lenders need help is obvious. A deal would bring together two of the region’s most inefficient banks. By eliminating the overlaps, a fitter national champion should emerge to help oil the wheels of Europe’s largest economy. The bloc relies heavily on its lenders to drive growth and, in the absence of the conditions for cross-border deals, this may be as good a deal as it gets.
Though cutting costs and overlaps at home could eventually improve profitability, a deal would do little to address the structural problems in Germany’s consumer market. It would also add risk and complexity to the two firms’ ongoing reorganizations – and wouldn’t necessarily fix Deutsche Bank’s securities trading business. With European policy makers keeping interest rates lower for longer, a combined Deutsche Bank-Commerzbank would be in no better position to escape the relentless squeeze on its margins.
Three decades spent chasing Wall Street have left Deutsche Bank with Europe’s largest investment bank – and one of the most unwieldy. Though the firm eventually gave up on trying to be the last man standing and has been retreating in some areas, the operation still accounts for about two-thirds of the overall firm’s risk-weighted assets after soaking up billions in fines for misconduct.
Commerzbank doesn’t have much of a securities business itself, having refocused on German consumers and small and medium-sized businesses, the backbone of the domestic economy. For Deutsche Bank, the thinking is that the tie-up will provide a deeper deposit base and so help to lower its funding costs. That should help the bank to compete more aggressively in securities trading – but it still wouldn’t remove the need for the lender to give up its ambition to compete with Wall Street peers on U.S. turf.
Commerzbank’s 2008 purchase of German rival Dresdner Bank AG forced it into a bailout that has left the government with a 15 percent stake. The bank is also just limping along. Last month, the lender lowered its target for return on tangible equity to between 5 percent and 6 percent by 2020. Deutsche Bank isn’t doing much better. Analysts are skeptical it will make its ROTE target of 4 percent this year.
Critical to making the combination work will be the cost savings the firms can achieve in Germany. Some put the job cuts that are needed at as many as 30,000. It's unclear if the banks will have the political backing to push those through. Finance Minister Olaf Scholz reportedly agreed not to stand in the way, but, in an interview with Bild, Helge Braun, Angela Merkel's chief of staff, said preserving jobs in the finance industry “is of course a very, very relevant point.” The messages look distinctly mixed.
A marriage between the two won’t immediately solve the industry’s structural inefficiencies. The combined bank would account for just 8 percent of the nation’s bank branches, giving it little pricing power in a cut-throat industry where hundreds of public-sector savings banks and cooperative lenders compete with commercial lenders on unequal terms.
What’s more, the European Central Bank’s negative interest rate policy continues to make banks’ core business far less lucrative. Among the bigger European institutions, the average net interest margin – the difference between the interest they receive on loans and what pay out on deposits, adjusted for assets – is about 1.6 percent, less than half of the 3.3 percent enjoyed by the top U.S. firms, according to Bloomberg Intelligence. The merged business would still be exposed to this headwind.
A combination will also be costly. In addition to the restructuring charges, a fresh look at the banks’ assets could prompt the need for yet more capital, while a bigger footprint could also lead regulators to require larger buffers. The firms could be forced to sell prized assets or tap investors for more funds.
Deutsche Bank Chief Executive Officer Christian Sewing had pleaded for more time when speculation about a deal first emerged. He was hoping to complete more of his own revamp, including integrating the two consumer brands the firm already owns, before adding yet more risk and complexity.
That he’s caved in and is moving toward a deal may be a sign that both lenders are poised to get weaker still. German regulator BaFin reportedly prefers a European deal because the two domestic banks are too feeble to benefit much from a merger.
Unfinished European regulation has left the region’s banks unable to move funds freely across borders, making international deals difficult and costly. Ultra-loose monetary policy has squeezed the profitability of their core business. Germany looks to have decided it is running out of time.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.
©2019 Bloomberg L.P.
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