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Merger Talks of Deutsche Bank and Commerzbank

Deutsche Bank to Shrink its US investment bank

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Deutsche Bank, Germany’s biggest bank is undergoing some key changes. From the possible merger with Commerzbank to the “too unprofitable” branch in the United States, it seems that 2019 Q3 will be crucial for the German institution.

According to a report published by the Financial Times, it seems that the American investment bank would be the weakest point of Deutsche Bank.

As shareholders are increasingly getting worried, regulators are stressing Deutsche Bank to trim its staff and its activity.

A large and unprofitable project

According to the report published by the Financial Times, “unnamed sources have revealed Deutsche’s own concerns about the lackluster performance of the unit, adding that informal discussions held last year within the bank put pressure on the FI’s Chief Executive Christian Sewing to cut back the unit’s operations”, commented Pymnts.com.

While none of the employees shared their names and no official press release was published, a top executive gave an anonymous interview to the Financial Times, last Sunday.

A senior shared to the media that regulators “started to make our regulatory expectations clear about two years ago, and we continue to have the view that Deutsche’s U.S. investment bank should shrink”.

Official numbers were not communicated, however a top executive shared with the FT that debt levels were dropping by 13% while laying off about 7% of its staff.

According to this employee, some more staff would have been asked to work on other tasks, such as “foreign exchange, transaction banking and secured lending”.

No need to say Deutsche Bank did not need this kind of publicity, while its merger with Commerzbank has already been compromised for months.

While talks have been happening for several months, it seems that the merger with Deutsche Bank was put on hold two days ago.
Newspaper reported that unnamed sources from within said that the board was “worried about clients loss. Deutsche’s internal estimates suggest that this would result in lost revenue of slightly more than €1bn a year, or about 3.5 per cent of the two lenders’ combined pro forma revenue of €33.5bn.”, reported the Financial Times.
Moreoever, the German government has been involved in the process – it owns a 15% stake in Commerzbank and has been reportedly wary of potential revenue loss. An analyst from JP Morgan told to the FT “estimated earlier this year that about 2.5 per cent of joint revenue — or just under €900m by 2021 — would disappear “due to [an] overlap in clients and businesses”. 

A German saga

Last but not least, the New York Times published a story last Friday night about how the story was perceived in Germany.

Back home, it seems that the merger is not popular at all either. “The powerful labor unions are against it. Regulators are wary, and could impose onerous conditions. Shareholders are skeptical. There is some formidable political momentum behind it, but the government is split over the wisdom of morphing Germany’s two largest banks into one”, reports the American newspaper.

As both banks are equally respected institutions that were established during the nineteenth century, the European Central Bank will have to get involved in order to validate the transaction – if the latter resumes soon.

“You want to make sure that the transaction is successful and to be successful means that it not only pleases shareholders but actually creates an entity which is strong and capable of coping with the various challenges” declared Mario Draghi, the president of the European Central Bank during a press conference.

As plans remain unsure, the efficiency of the banks were highlighted as being non-efficient for both banks – the lower number, the better. Commerzbank’s cost-income ratio is 80 percent in 2018 and Deutsche Bank’s is 93 percent. By comparison, Dutch bank ING was 55 percent last year.

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Note: The opinions expressed in this article are the author's own and do not necessarily reflect the view of Alvexo on the matter.