Deutsche Bank’s Last Hope

Deutsche Bank’s merger with Commerzbank could make Deutsche Bank the fourth largest bank in Europe with the potential to make Germany instrumental in the international market.  With Deutsche Bank (“Deutsche”) getting support from key German government officials to proceed with negotiations to merge with Commerzbank, it seems likely a merger between the two will succeed. Although a merger between the banks is probable, the banks face a great amount of opposition, and logistical issues, which may hinder the merger and any future success Deutsche could enjoy. The acquisition serves as a strategy to improve Deutsche’s competitiveness by giving Deutsche the necessary size and resources to compete in the global market.

On March 17, 2019, Deutsche, Germany's largest bank, announced it was in formal talks to acquire its rival Commerzbank, Germany's second-largest bank. (Patrick Winters et al., Bloomberg Law).  This merger would not only transform Deutsche into Europe's fourth-largest bank, but it would also give the bank a market value of around 25 billion euros. As a result, Deutsche will enjoy substantial savings on costs and funding expenses by boosting a combined market share in retail and banking, reducing its workforce, closing down branches, and pooling investments in both banks. (Steven Arons et al., Bloomberg Law). Additionally, a merger would allow Deutsche to have access to Commerzbank's retail deposits, which could provide a cheap source of funding to Germany's export sector. (Steven Arons et al., Bloomberg Law). Many, including Germany’s Finance Minister Olaf Scholz, support the merger because they believe a merged Deutsche will help provide the necessary funds to assist Germany’s transition to a stronger export-oriented economy and it will improve Germany’s competitiveness on the global stage. (Steven Aros et al., Bloomberg News). Although key figures in the government have supported the deal, many question the effectiveness of the merger.


Recent years have not been good for both Deutsche and Commerzbank. Both are perceived as being some of Europe's weakest banks, and years of business restructuring and weak earnings have resulted in a 90 percent decrease in shareholder value for both banks. (Nicholas Comfort et al., Bloomberg Law). Revenues at Deutsche have declined for the last eight quarters and analysts predict it will not reach its profitability target in 2019, which could result in a credit rating cut. (Patrick Winters et al., Bloomberg Law). Currently, Commerzbank believes it will notmeetits 2020 financial targets and it has cutits revenue outlook.  Id. With poor numbers and no concrete restructuring plan, the banks are left with very few alternatives besides merging. (Patrick Winters et al., Bloomberg Law). Despite this, there is no sign a merger will fix the banks’ problems.

As more details emerge on the impact of the merger, many issues have been raised. The most threatening to the merger is the potential elimination of around 30,000 jobs. (Nicholas Comfort et al., Bloomberg Law). The news of layoffs has created backlash and fierce opposition from labor unions and labor representatives. The sentiment against the merger has grown to such a degree, German Chancellor Angela Merkel has distanced herself from the merger stating, “I very much don’t want the government to intervene.” Id. If this sentiment becomes prevalent within the government, it will pose a serious threat to the merger as the German Government owns roughly 16 percent of the shares of Commerzbank, and a lack of complete governmental approval will likely quash the merger. Id. 

Investors are also hesitant to support the merger. Many speculate Deutsche could absorb Commerzbank through an all-share deal with current Commerzbank shareholders receiving new Deutsche shares. (Dinesh Nair et al., Bloomberg Law). To fund the merger, Deutsche will need to raise around 8 billion euros from shareholders orthrough sales of holdings like DWS Group asset management. (Nicholas Comfort, Bloomberg Law). Investors fear Deutsche will follow its previous pattern of raising equity in a share sale, which will dilute their holdings in the bank. (Dinesh Nair et al., Bloomberg Law). Additionally, investors are concerned Deutsche will not put the merger to good use. Id. 

Over the last eight years, Deutsche has raised around 34 billion euros to fund multiple failed restructuring plans. Further, both Deutsche and Commerzbank were not successful with recent mergersand there is a growing fear, among analysts, this merger will make Deutsche larger, but not successful. (Nicholas Comfort et al., Bloomberg News).Deutsche’s share of the global market has declined considerably and both Deutsche and Commerzbanktogether have very little market share in Germany. Deutsche’s impact on the global market is waning as net revenues at its corporate investment bank have declined, so substantially that Deutsche is contemplating closing three of its ten floors in its Hong Kong headquarters. (Nisha Gopalan, Bloomberg News).

The merger between Deutsche and Commerzbank seems very likely to occur. It has support from key supporters within the German government and it is the best plan Deutsche has to increase its competitiveness. Although Deutsche could become Europe’s fourth-largest bank, there is nothing suggesting its new size will create any significant changes needed for improvement. Deutsche's inability to generate profits and poor restructuring demonstrates internal issues a merger cannot fix. However, a merged Deutsche could fund global businesses in Germany, which could put it and Germany in a controlling position in the global market.