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Deutsche Bank's trading unit key to ECB in merger talks

Deutsche Bank/Bloomberg

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Supervisors at the European Central Bank (ECB) and national authorities want a clear idea of the degree the combined entity will depend on the securities unit for revenue.

Tuesday 09, April 2019

(Bloomberg) --Deutsche Bank’s troubled trading arm will be a focus of European banking regulators when they decide whether to approve a potential takeover of rival Commerzbank.

The rationale of the deal cannot simply be to use additional retail deposits to finance the investment bank.

Christian Sewing, Deutsche Bank’s CEO and Commerzbank’s Martin Zielke have been discussing a merger for three weeks. Investment banking is one focus of the talks as Commerzbank is assessing Sewing’s willingness to restructure that unit. For Deutsche Bank, a deal could help reduce stubbornly high funding costs by expanding the deposit base.

A takeover would mark the biggest test to date for the ECB’s supervisory arm after it started overseeing lenders less than five years ago. That means the ECB will be as stringent as possible to avoid being blamed should a merged entity run into bigger problems down the road.

Approvals are likely to hinge on plans to improve profitability and the banking watchdogs will be testing the credibility of the two lender’s business plans as well as checking them against expected cost savings and revenue as well as capital buffers.

Revenue from selling and buying securities at Deutsche Bank has been falling for seven consecutive quarters and the lender has guided for yet another weak period. Elevated funding costs are part of the problem because they make it harder to compete. A tie-up with Commerzbank would expand deposits, a particularly cheap source of funding, and add non-trading business lines to Deutsche Bank’s revenue mix.

Deutsche Bank would need regulatory approval to use the liquidity added through Commerzbank’s deposits throughout the group. That can help lower costs, for example if it’s invested as cash with the Fed rather than ECB.

The lender last year obtained a similar approval for another business that it acquired almost a decade ago, after pledging to cap the amount of retail deposits it would use to support US activities.

Some shareholders have been sceptical about Deutsche Bank’s securities unit, with several large investors asking the bank behind the scenes to continue shrinking the business, especially in the US.

 

TAGS : Deutsche Bank, Commerzbank, ECB, M&A

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