Teutonic tie-ups

31 August 2016 By Dominic Elliott, George Hay

The stars are aligning for an era of German banking consolidation. Commerzbank and Deutsche Bank held discussions in August about a possible tie-up, Reuters reported on Wednesday. While these came to nought, the wider logic of banking mergers is becoming increasingly compelling.

Germany’s banking market is highly fragmented. Assets of the top five banks represent only 32 percent of the market, according to ECB data – well below the European average. Germany still has a welter of cooperative-owned and public-sector savings banks.

Without the benefits of scale, persistently low interest rates bite. The sector’s net interest margin – which shows the difference between the interest banks earn and what they receive – was only about 1.25 percent last year, according to rating agency Moody’s, again less than the euro-zone average. Meanwhile, costs relative to revenue are higher at German banks than at continental peers. And in a scenario where rates fell 100 basis points by 2019, net interest income could fall by 32 percent, Bundesbank research indicated in June.

Given that, a merger of the 7.7 billion euro Commerz and 17.8 billion euro Deutsche Bank would make some sense. Even stripping out just 10 percent of Commerz’s costs might add around 5 billion euros to the value of the combined business, on a net present value basis, and should bump up returns. As it is, neither bank is earning a return greater than its cost of equity, the minimum a shareholder ought to require.

Seen from a broader perspective, a union of Commerz and Deutsche would be beset with difficulties. Commerz still has a minority government stake, so Deutsche shareholders would be signing up for unwanted oversight. Being bigger in Germany might mean higher capital requirements under global too-big-to-fail guidelines. And both banks have faced fines for bad behaviour in the past.

That doesn’t stop either of them sniffing around elsewhere. France’s BNP Paribas is expanding in Germany. And Italy’s UniCredit has a big German arm, HVB, the Bavarian strength of which might complement Commerz’s operations. Even if Deutsche and Commerz don’t belong together, other combinations may not be long in the making.

 

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