The German Government is pushing the country’s two biggest banks Deutsche (DB) and Commerzbank – into a merger that could very well be described as a disguised bailout.
The news was confirmed on Sunday after weeks of leaks and nods from the markets, politicians and then defacto confirmation last week.
On Sunday the word became official – but there is a long way to go to get to a merger before the work starts on making it work.
First up, while the merged bank will be a giant, in comparison with Australia’s big five backs – CBA, Westpac, NAB, ANZ, and Macquarie – it will be a tiddler.
The merged bank would have roughly 1.8 trillion euros in assets (more than $2.8 trillion), such as loans and investments, and a market value of about 25 billion euros ($A40 billion), based on Friday’s closing stock prices.
A merged bank would be the third largest in Europe after HSBC and BNP Paribas – in assets, but not profits.
By way of contrast, Macquarie has a market cap of just under $A44 billion, NAB, around $A70 billion and the ANZ, around $A75 billion (based on Friday’s closings).
At $A128 billion, the Commonwealth will be more than three times the market value of the merged DB and Commerzbank, based on closing prices last Friday.
Adding to the complication and appearance of a disguised bailout is the fact that Commerzbank is 15% owned by the German Government (because an earlier takeover of Dresdner Bank in 2008 forced it into a bailout.
Like DB (which is barely profitable) Commerzbank is battling to maintain momentum. Last month, the lender lowered its target for return on tangible equity (RPTE) to between 5% and 6% by 2020.
Deutsche Bank is weaker its ROTE target is 4% this year. That is a third or less of the underlying Return on Equity levels of the major Australian banks – especially the Big Four.
Commerzbank no longer has much of a presence in Australia, but Deutsche Bank maintains a large investment banking, broking, and funds management operation based in Sydney.
DB has also a long history of dodgy deals and massive fines and settlements to pacify angry regulators in Europe and the US (where it is still being blamed for being one of the driving forces in the subprime mess and GFC).
DB has battled (and survived, it must be said) probes into money laundering, sanctions violations, and Libor-rigging costing it around $US14.5 billion ($A20b) in fines and settlements.
A merged bank would have one-fifth of the German retail banking market. Together the two banks currently employ 140,000 people worldwide – 91,700 in Deutsche and 49,000 in Commerzbank.
If the merger happens that’s where many of the cost savings have to come from – closing branches businesses, quitting investment banking if need be, and slashing tens of thousands of jobs.
That’s a stance the unions in Germany will not like, nor the governments of some states which are facing political rivals who are increasingly opposed to job losses and big companies and banks.
If the merger occurs and the rationalization and job cuts don’t happen, then Germany and the European Central Bank will have another major financial headache on its hands.
And finally, this will be a very shaky organisation – both banks are fragile financially, both have very high costs and both will need official support if there is a recession and slowdown. That makes the merged bank a global threat to stability.
