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The marriage of Deutsche Bank and Commerzbank is off. Executives called off the engagement after it became clear this was far too complex a proposal, required too much capital and was not popular with worker representatives on the powerful supervisory boards.

Whilst there were clearly room for synergies, the not insubstantial execution risk and obstruction from key stakeholders eventually did for the merger.

Deutsche Bank CEO Christian Sewing said the two banks had ‘concluded that this transaction would not have created sufficient benefits to offset the additional execution risks, restructuring costs and capital requirements associated with such a large-scale integration’.

Supervisory boards played a key role

Supervisory boards were key. Worker representatives formed half the seats on the supervisory boards of both banks. Funnily enough they were none too keen about the prospect of combined job losses of as many as 30,000.

“Any deal between the two titans would have been enormously complex,” says Neil Wilson, Chief Market Analyst at Markets.com. “Deutsche was still in the process of integrating Postbank, which has proved very tricky. Yet another mega merger would not be any easier and multiply execution trouble. Another problem was customer overlap and leakage of customers from the combined entity.”

Arguably the biggest obstacle though was the required capital raise. Investors needed to be tapped up and there was no small hurdle to finding enough willingness to be on side.

Deutsche Bank reportedly needed to raise as much as €10 billion to fund the deal (although estimates varied from around €3 billion to as much as €16 billion), versus a market cap today of around €16 billion. Let’s not forget Deutsche has tapped investors for €30 billion since 2010 – another €10 billion was always going to be a thorny problem to grasp.

As recently as 2017 it raised €8bn from investors. Further dilution required a really strong rationale and both management and labour to be acting as one. Finally, balance sheet write downs would have made this a very costly deal.

What now for Deutsche Bank?

Deutsche Bank management say they will continue to review the alternatives. It’s not exactly clear what those are. It’s losing out to the big US banks in trading and investment, and its funding costs are greater than rivals. Going solo is going to be tough. Pressure will mount to further scale back investment banking operations.

On a positive note, the bank has also reported better earnings than forecast in the first quarter. For Q1 it expects pre-tax earnings of €290 million, and net profits of €200 million, beating expectations of c€140 million and €55 million respectively. RoTE is still targeted at 4% in 2019, but looks to be coming up a long way short.

“Whilst it’s not clear what Deutsche Bank can do now other than struggle on with its turnaround process under Sewing, Commerzbank on the other hand has many potential suitors,” notes Wilson. “It seems likely that the failure of the Commerzbank talks will accelerate discussions on merging its asset management business with that of UBS.”

Both Italian outfit UniCredit and Dutch bank ING are in the running to snap up Commerzbank. But neither may be the right answer. The German government was a backer of the proposed Deutsche-Commerzbank plans, with the aim of creating a German banking titan. Seeing Commerzbank acquired by a foreign bank would be a blow to national pride.

Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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