According to the news report by Bloomberg, Deutsche Bank AG’s Chairman Paul Achleitner is thinking about possibly combining the bank with Commerzbank AG. He stated that he has had conversations with top shareholders of the bank as well as key government officials about merging the two struggling banks into one bank that could thrive.
These, according to internal sources familiar with the matter, are just talks at the moment – no deals are planned and neither have formal discussions taken place. However, this is the not the first time such deals have been made and – occasionally – pushed through over the last 10 years as the country struggles to sustain such financial giants that are necessary for the massive economy.
What this piece of news does show is how much pressure Achleitner is under to pull Deutsche Bank out of the red and break what is now being termed the “vicious circle”.
According to the Emeritus professor of management practice at the Stern School of Business in New York University, Roy Smith, this merger could be long shot. However, the banks may just be able to succeed if they merge their retail businesses, reduce employee headcount and divest themselves of some global operations such as trading infrastructure. Smith, though, wasn’t too complimentary about the possible merger, saying that it was like two drunks together to give each of them more stability.
Both banks are currently struggling. Deutsche Bank’s share price dropped another 1.5% on Friday. The bank’s shares had already reached a record low the previous week, taking the losses the company has suffered to more than 40% for the year so far, pulling down its market value to €19.6 billion (~$23 billion). Commerzbank is also performing poorly, with its shares also dropping 1.5% in trading on Friday. This takes the German lender’s losses for the year to 25% and brings down the market capitalization to €11.7 billion (~$13.78 billion).
While the internal sources Bloomberg contacted said that Achleitner had initiated the proposal, Deutsche Bank states that this question has been raised repeatedly by the lender’s investors. According to the company’s spokesman, Joerg Eigendorf, their chairman has been constantly asked this questions, and it seems he always gives the same answer that all the pluses and deltas of such a merger are laid out in media and analyst reports, so it is up to shareholders voice their opinion. Besides that, according to Eigendorf, Achleitner has no real reason to actively pursue this line of thought.
The challenge that the German bank has been facing is what is being called a vicious circle. Numerous turnaround plans in recent years have not delivered the promised results, with revenues not justifying expenses, which have in turn led to credit rating downgrades, which have further led to funding costs becoming higher – a vicious circle.
However, now, according to James von Moltke, the bank’s Chief Financial Officer, the most recent strategic turnaround plan – a complete overhaul of the company which includes cutting down failing businesses to improve profitability – should finally turn things around, thereby making the circle a “virtuous” one.
While the bank itself claims that shareholders have been badgering the chairman about a merger, according to internal sources, investors have told Achleitner that now would not be good time for a merger with Commerzbank. The reason is simple, share prices for the bank are depressed and could even lead to a capital increase and massive write-downs.
In fact, the sources also stated that the two banks had actually held preliminary talks back in 2016, but decided against a merger while their focused on turning each of their companies around.