Deustche Bank’s Doomsday: Time is Running Out
Deutsche Bank AG has officially entered formal merger talks with Commerzbank AG. The Frankfurt-based investment bank, crowned as Germany’s financial institution, controls over $1.3 trillion assets under management, and has suffered an onslaught of losses through speculative trades, poor financial policy, and judicial fines over the past decade. Commerzbank AG, Germany’s second largest bank, has $462 Billion AUM (Strasburg, Jenny).
The rationale behind Deutsche Bank’s decision to merge with its fiercest competitor lies around the notion of wanting to bridge together two large, but slowly deteriorating, banks, in order to compete with established U.S investment banks and upstart Chinese banks. According to the Wall Street Journal, while the Stoxx Europe 600 Banks Index has suffered a 19% loss since March of 2018, both Deutsche Bank and Commerzbank have suffered losses in share price of up to 37%, an even deeper loss than the one generally suffered by European financial institutions reacting to a European economic slowdown (Strasburg, Jenny).
Once deemed Europe’s most ambitious investment bank, Deutsche Bank has suffered from a variety of losses in recent years, including judicial penalties on banking involvement with economically sanctioned nations, involvement within mortgage securities dating back to the financial crisis, in which the settlement came out to $7.2 Billion between the bank and the U.S Justice Department, a $1.6 Billion loss on a failed municipal bond investment, and even ties to U.S President Donald J. Trump, in which Deutsche took on a variety of risky loans with the past Real Estate mogul, losing cash on a multitude of various loan instruments. The primary source of these losses and poor decision making, as reported by the Wall Street Journal, is that unlike major U.S investment banks, who took taxpayer money in order to shed bad assets during the financial crisis, Deutsche instead “didn’t take German-government funding and went after weakened rivals’ clients.” Since then, Deutsche has continued to contend with illiquid and complex security positions within their books, which has pressured management to take on extreme risk and plunge into different instances of poor judgement, such as the loan instruments offered to Donald Trump, or even illegal behavior, such as the bank’s dealing with nations under economic sanctions. All in all, this has caused the bank’s revenue streams to continue to decrease year after year, leading to Deutsche Bank’s failure when attempting to contend with the powerhouse investment banks in the U.S, the fast growing Chinese banks in East Asia, and even some of its European counterparts, such as London-based HSBC Holdings and French-based BNP Paribas. (Enrich, David).
According to Germany’s DW News, Germany’s banking sector remains one of the most “overbanked” banking sectors in the world, in which nearly 1,800 separate banking entities exist. Though Deutsche Bank remains atop Germany’s list of investment banks, it possesses a low level of market share due to the overbanked system in the nation. This, paired with decreases in yearly revenue and a general slowdown in competitive edge as compared to its international peers, all led Deutsche to begin merger talks with Commerzbank. Through this, DW News states, Deutsche hopes to create a banking institution large enough that market share is rapidly expanded, allowing for greater revenue and profit margins, something both banks desperately require. According to the New York Times, the German government supports this merger, due to both its 15% ownership stake in Commerzbank, as well as the German government recognizing its lack of global competitiveness as it pertains to banking (Eigendorf, Jorg).
However, according to numerous sources, the merger may become a risk, both for the banks and the government. Firstly, the merger would create a situation in which the combined firm would become a “too big to fail” bank, in which a taxpayer-funded bailout would be the only solution if it were to fail. Next, the combined merger is estimated to cost roughly 30,000 jobs, primarily because of the fact that merging requires a hefty amount of cash and jobs would be required to get cut in order to access that cash. A steep job loss such as this would of course, not only hurt the German economy, but would also weaken the support for the current German government, led by Chancellor Angela Merkel. Finally, the simple question remains as to whether or not combining two weak banks would truly build a strong one. Due to the fact that two weak banks of large size have never merged together before, analysts can only predict what would become of the combined firm. Will it rise to power quickly, and become a celebrated German colossus? Or will combining two weak banks simply make the matter worse, deepen the losses, and further the complexities already present within the banks at the moment? In my opinion, a combination of two banks who have persistently struggled with management and legal issues as well as financial consequences from the Great Recession, alongside the fact that both are based within a continent many economists have deemed as nearing a long-term slowdown, simply will make the matter worse. Though greater market share and through that, greater revenue, can occur by the merger at least in Germany, the prospects of greater market share throughout the world, especially as it pertains to competing against the giants in the U.S., seems highly unlikely. On top of all of this, monopoly-related legal issues, new securities laws, and generally greater regulation can all hamper the potential for long-term success if these giants banded together.
Investors however, believe a merger is a positive sign. Though financial analysts continue to crunch the numbers in order to determine how a merger can be executed, Deutsche Bank’s stock (NYSE:DB) has risen 2% and Commerzbank’s stock (XE:CBK) has risen 4.7% since the news broke. Though it will be interesting to see what will result of the merger talks and whether or not the banks are genuinely serious about merging or simply testing hypotheticals, one thing is for certain: Deutsche Bank has hit its doomsday clock and needs to extend it, fast.
Enrich, David. “A Mar-a-Lago Weekend and an Act of God: Trump's History With Deutsche Bank.” The New York Times, The New York Times, 18 Mar. 2019, www.nytimes.com/2019/03/18/business/trump-deutsche-bank.html.
News, DW. “Deutsche Bank & Commerzbank Merger: Pros & Cons | DW News.” YouTube, YouTube, 18 Mar. 2019, www.youtube.com/watch?v=LSHVWjS_Qmo.
Spielman, Samantha. “Deutsche Bank's Buffett Bond Valuation Brought to Light Nearly Two Decades Later.” SnoQap, SnoQap, 27 Feb. 2019, www.snoqap.com/posts/2019/2/27/deutsche-banks-buffett-bond-valuation-brought-to-light-nearly-two-decades-later.
Strasburg, Jenny, et al. “Deutsche Bank and Commerzbank Enter Formal Merger Talks.” The Wall Street Journal, Dow Jones & Company, 17 Mar. 2019, www.wsj.com/articles/deutsche-bank-and-commerzbank-plan-to-announce-formal-merger-talks-11552818003.
Strasburg, Jenny. “The American With the Toughest Job in Finance: Saving Deutsche Bank.” The Wall Street Journal, Dow Jones & Company, 5 Mar. 2019, www.wsj.com/articles/the-american-with-the-toughest-job-in-finance-saving-deutsche-bank-11551801710.