Regulators fear Deutsche Bank could bungle Commerzbank merger
Supervisor of German lender worries it lacks ‘ruthless brutality’ to cut costs
European banking regulators are concerned that Deutsche Bank lacks the “ruthless brutality” needed to do a successful merger with Commerzbank and would only approve a deal only if implementation plans were “credible and viable”.
Germany’s largest lender is in talks about a potential takeover of its main domestic rival, while some shareholders, its own chairman and the German government have been arguing in favour of a quick tie-up.
A tie-up with Commerzbank would create the eurozone’s second-largest lender with €1.9tn in assets.
The potential deal would require the approval of the European Central Bank, Bundesbank and Germany’s banking watchdog BaFin. But officials at Deutsche Bank’s regulators told the Financial Times that their biggest concern was whether a failed integration would leave them with an even bigger problem to sort out.
“You have to employ ruthless brutality to be really successful,” said a senior supervisor of the bank, adding: “Should the deal fail, we would have regulatory issues that we are keen to avoid.”
Deutsche Bank’s management board gave chief executive Christian Sewing a mandate last month to engage in informal talks with Commerzbank.
Mr Sewing said last year that Deutsche Bank needed 18 months of internal restructuring before it would be ready to engage in mergers and acquisitions.
The supervisor said that a credible strategy to implement the deal quickly would be “one of the core issues” when deciding whether to approve a deal.
Two other people familiar with the watchdogs’ internal discussions confirmed the supervisors’ concerns over execution risks. The ECB, Bundesbank and BaFin declined to comment.
Deutsche Bank regulators’ are preparing to closely monitor the implementation of a merger in regular meetings with senior bank management in an attempt to make sure that the execution remains on track.
“There would be man-marking by the regulators,” said the supervisor, referring to a defensive strategy in football where defenders are assigned to closely follow a specific player of the opposing team.
Regulators would insist on an ambitious execution time table and monitor its implementation in regular meetings with the lender’s management.
Analysts, investors and regulators are convinced that the success of a merger hinges on ambitious cost-cutting in Germany, the lenders’ highly regulated home market with powerful trade unions.
Analysts estimate that 20,000 jobs, if not more, could be chopped. “This would be a bloodbath,” another senior Deutsche Bank regulator said. Service sector union Verdi, which has representatives in both supervisory boards, is opposing a merger.
“The execution risk [is] the biggest unknown,” Kian Abouhossein, analyst with JPMorgan, wrote in a recent note to clients.
He warned that even without a merger, Deutsche Bank was “already having lots on its plate” as it needed to turn round its ailing investment bank, restructure its German retail business and deliver on its pledge to cut overall costs by €1bn this year.
Investors and analysts said Deutsche Bank’s bungled 2010 takeover of German retail rival Postbank was a cautionary tale.
Almost a decade later, after spending several billions on integrating costs and several strategic U-turns, Deutsche Bank is still working on integrating Postbank, saying full synergies will only be realised by 2022.
Stuart Graham, founder of Autonomous Research, calls the Postbank acquisition “another disappointing deal”.
Regulators are concerned that the margin of error for Deutsche Bank in executing a merger with Commerzbank would be very thin.
“The credibility of such a transaction hinges on quick and consistent implementation,” said the supervisor, adding that the required restructuring needed to be “radical” and the implementation plan needed to be “credible and viable”.
The supervisor warned that even relatively minor delays could lead to widespread disillusionment among investors, which could dent the bank’s share price and inflate its refinancing costs.