By Christopher Thompson
LONDON, April 25 (Reuters Breakingviews) - Europes big bankmerger is no more. Deutsche Bank
As both CEOs acknowledged, merging their domestic businessesmade sense in a fragmented market. Combining DeutschesGermany-focused private and commercial banking division withCommerzbank and extracting synergies of one-fifth of theircombined cost base would have meant a return on tangible equityof 9.6 percent, according to a Breakingviews calculation. Plan Bfor Deutsche would thus have been for Sewing to stick to hiscurrent strategy of cutting costs, and then try to reprise theCommerz merger in a few years time.
That Plan B, however, has two flaws. One is Deutsches PlanA doing the Commerz deal now has failed because Deutschesunderperforming trading unit pushed potential synergies downdramatically. The other is Commerz, which is 15 percentstate-owned, has its own more enticing Plan B.
Frances BNP Paribas
Whoever prevails, both Berlin and Sewing therefore need aPlan C for Deutsche, whose five-year subordinated credit defaultswaps jumped 20 basis points to 350 bps on Thursday. InDeutsches statement, Sewing added that the investment banksnet revenue for the first quarter implied a 14 percentyear-on-year drop.
A robust Plan C would see Sewing slash the investment banksrisk-weighted assets by a third. If the hit from doing this werearound 6 percent of the total including servicing costs, as wasbroadly the case at Credit Suisse
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CONTEXT NEWS
- Deutsche Bank and Commerzbank said on April 25 theirmerger talks had ended, with execution risks, restructuringcosts and capital requirements scotching attempts to create oneof Europes largest banks by assets.
- After thorough analysis, we have concluded that thistransaction would not have created sufficient benefits to offsetthe additional execution risks, restructuring costs and capitalrequirements associated with such a large-scale integration,"said Deutsche Bank Chief Executive Christian Sewing in astatement echoed by his Commerzbank counterpart Martin Zielke.
- The prospect of a merger was met with strong oppositionfrom the workforce with unions fearing 30,000 job losses andconcerns voiced by investors and regulators.
- German government officials, led by Finance Minister OlafScholz, have pushed for a tie-up to create a national bankingchampion and end questions over the future of both banks, whichhave struggled to recover since the financial crisis.
- Commerzbank shares were 2.7 percent lower at 7.57 euros by1200 GMT on April 25, while Deutsche Bank's were flat at 7.59euros.
- Deutsche Banks five-year subordinated credit default swapspread jumped over 20 basis points to around 350 basis pointsaccording to IHS Markit data, a sign that traders think thebanks credit risk has increased following the collapse ofmerger talks.
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<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^German bank merger hopes crumble as Deutsche Bank andCommerzbank scrap talks
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Editing by George Hay and Bob Cervi) ((Christopher.G.Thompson@thomsonreuters.com; Reuters Messaging:Christopher.G.Thompson.thomsonreuters.com@reuters.net))
