The shotgun marriage that could revive Deutsche Bank
Still scarred by the financial crisis, Germany’s largest lender may be forced into a tie-up with Commerzbank, writes Iain Withers
For the investment banks that would be Europe’s champion, jockeying to take on the US titans like Goldman Sachs or JP Morgan, it has been a chastening decade. Deutsche Bank, Barclays, UBS and Credit Suisse have all recovered far less quickly than their American peers since the financial crisis.
Yet even among the ranks of European laggards, Deutsche Bank sticks out a mile as the most disappointing.
It has staggered from crisis to crisis and unlike its rivals it still has deep restructuring ahead of it.
A third consecutive annual loss and slow progress on cost cutting led the board to oust Yorkshire-born chief executive John Cryan in April.
To add to the humiliation the bank’s US unit failed a Fed stress test this summer and was banned from paying dividends back to its HQ in Frankfurt, shortly after it emerged it had been on a Fed watch list for some time.
Mr Cryan’s successor, Deutsche Bank lifer Christian Sewing, insists he has a credible rescue plan for Germany’s largest lender.
This will include pushing through more than 7,000 job losses, with the axe mainly falling in its underperforming investment bank that incorporates 8,000 staff in London.
But more drastic changes could be on the cards. Mr Sewing has alarmed some investors by hiring one of Deutsche Bank’s investors – New York-based private equity firm Cerberus, which has a 3pc stake – as an adviser on its strategy.
The move has set tongues wagging in the industry that Cerberus could push for a merger of Deutsche Bank with Commerzbank, another underperforming German lender in which Cerberus also has a stake. It would create a behemoth with combined revenues of €35bn (£31bn).
Matt Zames, Cerberus president and a former senior JP Morgan banker, will be part of the advisory team working with Deutsche Bank.
To some it smacks of desperation. “It’s highly unusual,” says a senior banker at a rival lender. “Matt Zames is an experienced banker, but if you want him guiding the strategy shouldn’t you hire him as CEO?”
It remains one of banking’s big unresolved questions – what will it take to save Deutsche Bank?
Central to Mr Sewing’s plan is much more decisive and aggressive cost cutting. The bank is pulling back in some under-performing areas of investment banking – including US rates and corporate finance in both America and Asia.
At the same time it is doubling down in fields where it is comparatively stronger, for instance by investing in its trading business.
Already in the second quarter there were some encouraging early signs. Deutsche Bank had a pleasant surprise for once when it announced some numbers early last month because they had beaten market expectations.
The bank posted quarterly pre-tax profits of €711m. These were down 14pc on the prior year, but not as much as feared. Deutsche Bank also got to work shedding jobs, with about 1,700 of the 7,000-plus planned cuts coming during the period.
Mr Sewing struck a relatively upbeat tone, telling investors: “We’re making important changes to our core businesses as promised, we’re headed in the right direction on costs, and our balance sheet quality is strong.”
However Deutsche Bank has an awfully long way to go. It still trades at around a dismal 70pc discount to book value. Analysts have also criticised Mr Sewing’s plan for not being radical enough. Perhaps that is where Cerberus is meant to come in and a mooted shotgun marriage between Deutsche Bank and Commerzbank.
If so, analysts are not convinced. Keefe, Bruyette & Woods (KBW) has crunched the numbers and says in a recent note that while it makes “optical” financial sense and has potential to boost earnings, it would be tough to achieve the necessary cost savings.
KBW believes nearly 40pc – or 1,100 – of the combined bank’s 2,800 branches in Germany could be axed, where they overlap by less than half a kilometre. But this would be fraught with difficulty and potentially spark a political backlash. The integration of two complex lenders could also prove challenging, they say. Ultimately KBW argues the banks would be “better served funding internal restructuring rather than M&A activity”.
Yet industry sources believe Cerberus’s involvement makes the mega-merger more likely, despite the uncertain benefits.
A City hedge fund manager tells The Daily Telegraph “preservation” would be the rationale for both lenders. “Commerz might be interested as it’s in a difficult place itself. It would be an in market mercy kill,” the source suggests.
Deutsche Bank’s half-year results were thrown into harsh relief by its main European rival Barclays last week, which posted bumper quarterly profits. Barclays’s own investment bank has started to hit its stride this year, although analysts questioned last week whether this could be sustained into the second half.
Like its European rivals, Deutsche Bank is also at a competitive disadvantage to its American peers, as US banks are exposed to a domestic economy that has had rocket fuel poured on it by President Donald Trump in the form of tax cuts.
Whether or not Mr Trump’s debt-fuelled strategy will backfire long term is of little comfort to European lenders now, as they are anchored by more sluggish economies and face potential further disruption from Brexit.
Early in his tenure Mr Sewing was refreshingly candid when he wrote in a memo to staff that he was “sick and tired of bad news” at Deutsche Bank.
He has an uphill battle ahead to generate more positive headlines.