Commerzbank ought to consider merging with HVB - RTRS
01-OCT-2015 10:58:30
LONDON, Oct 1 (Reuters Breakingviews) - German banks are seldom the stuff of fantasy. But a union between Commerzbank CBKG.DE and HypoVereinsbank is worth considering. The German lender's returns are meagre, while Italy's UniCredit CRDI.MI, which owns Commerz's Munich-based rival, could use extra capital. A tie-up could kill two birds with one stone.
Commerz, 15 percent owned by the German government, is a serial destroyer of shareholder value. It made a 1 percent return on equity last year. Even by 2018, that will only increase to 5.5 percent, according to Eikon estimates.
HVB looks better off. Its equivalent returns were only 5 percent in 2014, but with a far bigger relative equity base. HVB made more than twice Commerz’s 264 million euros in earnings last year, despite having a balance sheet half the size on a risk-adjusted basis. A tie-up would create a 900 billion euro asset national champion, with HVB's strength in Bavaria complementing Commerz's elsewhere.
An all-share merger would make most sense. As of Sept. 30, Commerz’s market capitalisation was 12 billion euros. HVB doesn’t have a standalone market value, but assume it trades around book value, in line with the wider European banking sector, and it would have a notional value of 19 billion euros – implying UniCredit would hold 62 percent of the combined group.
If the two could squeeze out 1 billion euros of annual pre-tax synergies, equivalent to 15 percent of combined operating costs, they could create savings with a net present value of 7 billion euros to 8 billion euros. Commerz's government stake should then be worth more, facilitating a quicker sale.
UniCredit’s capital could improve, for two reasons. HVB’s current 23 percent core Tier 1 ratio makes it hugely overcapitalised: selling it with a lower capital ratio of 12 percent could allow 9 billion euros to be upstreamed to its Italian parent. Second, if UniCredit also sold its stake in the merged bank down to 35 percent, it could push its core Tier 1 ratio up from 10.5 percent currently to over 12 percent.
Back in the real world, a merger of Commerz and HVB would need careful handling. Berlin would be wary of layoffs. German regulators and Commerz would drive a hard bargain on valuation and capital repatriation. And UniCredit’s gains could be offset by Basel capital rules obliging banks to deduct surplus capital held by newly created minority interests. Still, as fantasy mergers go, this one is worth pondering.