Deutsche Bank-Commerzbank merger: Long live the kingmaker
However the situation plays out, it might be the smaller firm that ends up in the stronger position.
The sector is unprofitable in Germany, so a merger is the only thing that makes sense, but the sector is unprofitable, so a merger can’t help either firm.
Commerz has its legacy books of Italian and Spanish sovereign debt to deal with, Deutsche has its struggling trading operation, and the first quarter of 2019 has not exactly started well for the European banks.
More worryingly, its transaction services business is also struggling to keep up the pace.
However, under IFRS 3, Commerz’s sovereign books will have to be fair-valued at the point of merger, which means a chunky negative goodwill figure, and a concomitant capital gain for the acquirer.
As CreditSights’ analysts note, €10.5 billion of negative goodwill could take pro-forma CET1 from 11% to 13%. That might not be enough to obviate a fresh capital raising by Deutsche, assuming Deutsche is the acquirer, but it should lessen the requirement.
However, all of that is by the by. This deal, if it happens, will not be about making the numbers add up on a spreadsheet – it will be about politics, and that’s what has got Commerz bankers jumpy.