Deutsche Bank's Investment-Banking Arm Looms Large Over Commerzbank Merger Talks

By Jenny Strasburg, Patricia Kowsmann and Ben Dummett 

FRANKFURT -- The fate of Deutsche Bank AG's global investment bank, including its embattled U.S. operations, has emerged as a focus of debate following the first week of formal merger talks with Commerzbank AG, according to people familiar with the matter.

The two German lenders announced last week they are in deal talks following months of speculation. The banks have spent billions of dollars in recent years restructuring, overhauling management and cutting staff in a bid to revive their fortunes as independent lenders. But the German government, worried the country could be left without a single strong lender with global reach if their troubles persist, has urged them to consider a deal.

The tone of merger talks in Frankfurt has been constructive, people close to the banks say, but executives and advisers have only started to tackle thorny issues.

Commerzbank executives, to proceed, want a clear picture of Deutsche Bank's willingness to restructure its investment bank, some of the people say. The anticipation of some 30,000 merger-related job cuts -- many of them in German retail-banking branches and back-office positions -- has contributed to the focus on Deutsche Bank's trading and advisory businesses.

Deutsche Bank's executives have long argued that the units are essential to a global investment bank serving European companies abroad. Deutsche Bank has also seen its significant U.S. presence as key to its plans.

But the bank's U.S. operations have been on a tighter-than-normal regulatory leash since 2017, when the Federal Reserve downgraded them to the rare status of "troubled condition." The designation has constrained certain risk-taking as the Fed monitors the bank's progress in improving controls, management oversight and other areas, people close to the bank say.

The Fed doesn't plan to seek to prevent a merger, a person close to the matter said. Senior Fed officials have spoken with German Finance Ministry officials about a potential Deutsche-Commerzbank tie-up, and the U.S. regulator signaled it wouldn't stand in the way, the person added. The Fed in such cases would typically separate its supervisory work from policy-making around foreign banks, choosing not to interfere with foreign bank mergers in their home countries.

Commerzbank has a small U.S. presence, but a merger nevertheless could complicate Deutsche Bank's U.S. cleanup work and add another layer of Fed scrutiny, people close to the bank say.

The banks hope to finish their initial discussions in a month or so. They could abort talks or enter a deeper due-diligence process. A deal probably would take months to complete, people close to the lenders say.

Big cultural differences between the banks -- Deutsche Bank is a longtime global trading force, while Commerzbank is a smaller, domestically focused lender -- have fueled questions about how their combined businesses might look after expected cuts in overlapping areas, according to people with knowledge of the discussions.

Some people close to the banks say concessions about how capital and how many jobs would be allocated between German corporate lending and riskier operations like trading could prove one of the biggest hurdles in discussions.

With projections that roughly one in five jobs at the combined bank would be cut, a home-market bloodletting of lower-paid roles could spark criticism if traders and investment bankers elsewhere are viewed as protected. "We reject a possible merger of both banks because of the danger it presents for tens of thousands of jobs," Jan Duscheck, a representative of Germany's Verdi union, which sits on both banks' supervisory boards, said in a statement.

Whether or not Deutsche Bank merges with Commerzbank, it needs to pare back or pull out of investment-banking businesses that lose money or barely break even, narrowing its reach and therefore its ambitions, some investors and analysts say. The counterargument is that dramatic cuts could undercut the German government's drive to create a national champion.

The merger talks spurred one prominent shareholder to weigh in Friday. BlackRock Inc. Vice Chairman Philipp Hildebrand, speaking at a Frankfurt conference, cautioned against European banks pursuing a merger motivated by a desire to create a big investment bank to compete directly with U.S. investment banks.

Mr. Hildebrand didn't name Deutsche Bank and Commerzbank but was referring to them, according to a person familiar with the remarks. BlackRock is a top shareholder in both lenders. A person briefed on the firm's view of a Deutsche-Commerzbank merger said it is skeptical but waiting to hear crucial details.

Also Friday, Deutsche Bank published 2018 executive-pay figures that showed its investment-banking chief, Garth Ritchie, earned the biggest total pay package among management-board executives last year, with EUR8.6 million ($9.7 million). The pay package exceeded that of Deutsche Bank CEO Christian Sewing.

The investment bank suffered a steep profit decline last year. Full-year 2018 revenue declined 8% across the business and 16% in sales and trading, the unit's biggest source of revenue.

Mr. Ritchie has said privately in recent weeks that he believes in the long-term strategic rationale for a merger with Commerzbank, but also that banking mergers are notoriously complicated, according to people familiar with the remarks. His view is it is too early in the merger talks to know whether a deal makes sense, one of the people said.

--Bojan Pancevski contributed to this article.

Write to Jenny Strasburg at [e-mail], Patricia Kowsmann at [e-mail] and Ben Dummett at [e-mail]

(END) Dow Jones Newswires

March 24, 2019 14:26 ET (18:26 GMT)

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