Pros And Cons Of A Commerzbank-Deutsche Bank Merger: Impact On Key Metrics
Shares of Deutsche Bank (NYSE:DB) have been upbeat over the last two days as investors reacted positively to reports of merger-related talks held between the bank and Commerzbank earlier in August. [1] A potential merger between the two largest German banks would unlock substantial value for investors in both banks in the form of cost synergies, while also helping the combined entity improve profitability in the long run from better economies of scale.
Deutsche Bank CEO John Cryan responded to the situation by reaffirming his plan to shrink the bank’s complex business model. [2] But his argument that the German banking industry will need to consolidate in the near future to ensure sustainability indicates that he remains open to big ticket acquisitions as a part of his quest to improve the fortunes of the banking giant. [3]
We will explore various aspects of a potential merger between Deutsche Bank and Commerzbank over the next few days, beginning with a general overview of the two banks and the direct impact of their combination on several key metrics.
See our full analysis for Deutsche Bank
Deutsche Bank Focuses On Investment Banking, Commerzbank Primarily A Retail Bank
As you can see from the chart above, Deutsche Bank’s investment banking operations (Sales and Trading, and Advisory & Underwriting Services taken together) contribute more than 50% of its total share value, according to our analysis. The importance of these operations in Deutsche Bank’s business model is demonstrated by the fact that they generated €14.2 billion in revenues for full-year 2015 – more than 40% of the consolidated revenue figure of €33.5 billion.
While Deutsche Bank has an extensive retail banking presence in Germany, it failed to successfully integrate Postbank’s operations to its own retail bank network despite incurring huge restructuring costs over recent years. The bank is now looking to spin off Postbank, and also took a multi-billion Euro goodwill impairment charge in this regard last year.
In contrast, Commerzbank’s investment banking revenues for full year 2015 were €2 billion, which represents just 20% of its total revenue figure of €9.8 billion. The bank’s retail and wealth management operations in Germany roped in €3.8 billion last year, while the SME banking division (Mittelstandsbank) brought in an additional €2.7 billion – together contributing more than 65% of the top line.
Key Metrics Head-To-Head
The table below summarizes key balance sheet metrics as well as employee and branch strength for both Deutsche Bank and Commerzbank at the end of Q2 2016. The last column shows the respective figure for the combined entity, assuming the two banks merge. All figures are taken from the banks’ respective Q2 earnings releases.
Notably, the combined entity formed by Deutsche Bank and Commerzbank would have more than €2.3 trillion in assets. This is an asset base of just under $2.6 trillion using current exchange rates – making Deutsche Bank the 6th largest bank in the world in terms of total assets after the Big 4 Chinese banks and HSBC (NYSE:HSBC). The largest U.S. bank, JPMorgan Chase (NYSE:JPM), would be displaced to the #7 position with its $2.47 trillion in total assets at the end of Q2 2016. It should be noted, though, that JPMorgan is at a disadvantage compared to HSBC and Deutsche Bank, as it follows U.S. GAAP to prepare its financial statements (which requires netting of derivatives) while the European banks follow IFRS rules (which use gross derivative values).
In the second part of this article series, we will provide our estimates for the valuation of both these banks, and also calculate the value of synergies that can be realized from a potential merger.
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- Deutsche Bank, Commerzbank held talks about tie-up, Reuters, Aug 31 2016 [↩]
- Deutsche Bank and Commerzbank Said to Have Held Merger Talks, Bloomberg, Aug 31 2016 [↩]
- Deutsche Bank C.E.O. Calls for More European Bank Mergers, The New York Times, Aug 31 2016 [↩]