Germany seems to be obsessed with the idea of creating a national banking champion. Is it a way of standing up to the big-ticket US banks, or reaffirming Germany’s dominance as the biggest European economy? Either way, it looks like the country is pushing to create yet another “too big to fail” bank.
Back in 2007, Deutsche Bank had a balance sheet of €2 trillion (£1.72 trillion) and a market capitalisation of nearly €50bn, compared to Commerzbank’s relatively humble total assets of €270bn and a market cap of €17bn.
But over the last 10 years, the gap has narrowed. Deutsche Bank has lost €600bn of assets and its market cap is down more than 60 per cent. On the other hand, Commerzbank has gained around £100bn or so in total assets, but has lost half of its market cap.
A merger would give Deutsche Bank and Commerzbank control of around €1.8 trillion of total assets, and the German government seems to want to step on the accelerator to get this done – it was announced on Sunday that the two banks will hold formal merger talks.
But any tie-up would likely be viewed as an embarrassment for the likes of John Cryan, the former chief executive of Deutsche Bank, Christian Sewing, the bank’s current boss, and Peter Altmaier, the German economy minister.
All along, the three have been reaffirming their faith in Deutsche Bank’s strategy and its position as one of Europe’s strongest banks. Sewing took over as chief executive in April last year, and in September he said that the bank may consider a merger once it has boosted its profitability over the next 18 months. Little did Sewing know that he would be pressured into talks even before the end of this period.
While the merger will give Deutsche Bank access to a much bigger balance sheet, it could also mean a multi-billion euro financial hole, because it would force the revaluation of both lenders’ assets. There’s also a risk of 30,000 jobs being cut.
The merger, if it were to happen, will be embedded with certain caveats. The German government still owns about 15 per cent of Commerzbank, and a merger would mean a bigger say from the government in the bank’s dealings. It could also mean that the banks may be pressured to be more risk averse in their dealings as compared to 10 years ago. While this is good news from a checks and balances point of view, this will likely recalibrate the bank’s risk-reward equation, potentially curtailing profits.
However, the last 10 years for Germany’s two largest lenders haven’t been a cake walk. Shares of Deutsche Bank are down more than 80 per cent over a 10-year period, while Commerzbank shares have lost nearly all their value over that period, down 93 per cent.
Germany’s biggest banks are eyeing up a partnership, but marital bliss is far from guaranteed.