Deal hopes dead, Deutsche Bank urgently needs answers
Merger talks with Commerzbank have been a costly distraction lender could ill afford
Sometimes it’s hard to know whether to laugh or cry.
Deutsche Bank investors will know this feeling after talks collapsed over a potential merger with domestic rival Commerzbank Thursday. No deal means no dilutive share issue from Deutsche: Good news and the stock initially leapt nearly 5%. But as the news sunk in, the stock fell back and was 1% lower by late afternoon. Boo-hoo.
Life looks tough for both banks. A global slowdown is hard on export-led Germany, which is why banks, politicians and unions all got cold feet over a takeover that would have meant the loss of tens of thousands of German jobs.
What now?
For Deutsche the answer is much less certain than for Commerzbank.
The latter’s stock dropped Thursday as immediate hopes of Deutsche paying a takeover premium vanished.
But Commerzbank stock still trades at a smaller discount to book value than its fickle suitor’s.
Its turnaround is more advanced, and it still has a good chance of attracting another bid, perhaps from Italy’s UniCredit or Dutch bank ING. Either could prove to be a complementary match.
For Deutsche, the uncertainty remains for its business model and stock price alike. The bank’s official answer is to stick to the existing plan: remain disciplined with costs and slowly reorient the business toward repetitive rather than transactional revenue—which means more loans and asset management, less dealmaking and trading.
It will also look for return-enhancing cuts to investment banking and trading in general.
The trouble is that any change needs to boost profitability straight away. The bank said first-quarter net income was 200 million euros, which means an annualized return on tangible equity of about 1.5% versus its target of at least 4% for 2019. Full results are due Friday.
In a memo to staff, Chief Executive Christian Sewing said Thursday that if the costs of Germany’s annual bank levy—a measure introduced after the 2008 financial crisis to raise funds for banking rescues—were spread evenly through the year, the first-quarter return would have been 3.6%.
That may be closer to target, but it still leaves no room for error or for more restructuring costs.
Now that he has hit his cost targets, Mr. Sewing needs above all to show a turn in revenue. This is much, much harder: Financial markets are showing no signs of great activity, while central banks around the world have become more nervous about raising interest rates, which would make it easier to profit from lending.
For investors, Deutsche’s 4% return target looks both remote and underwhelming even if achieved.
Commerzbank wouldn’t have guaranteed better, but a merger process would have given executives more time.
Instead it has all been an unnecessary distraction. Deutsche needs better answers—and fast.