Despite the reservations of the German government, a foreign buyer must be the preferred way forward for Commerzbank, writes Brian Caplen.

The collapse of the proposed merger between Deutsche Bank and Commerzbank takes away one bank management headache – the high risks involved in any merger – but puts both banks back at square one. They both face the challenge of finding a viable European banking strategy in conditions that are far from ideal: a low-interest-rate environment in sluggish economies without the kind of banking union that would make cross-border activities the obvious choice for growth.

In Germany, these problems are compounded by the fragmented nature of the domestic market in which public sector banks such as Sparkassen and Landesbanken play a key role. As a 15% shareholder in Commerzbank, the German government was keen to see a domestic merger and the creation of a national champion in line with broader policy objectives.

But in the end the hurdles of a merger  – the need to raise more capital, high job losses and the pains before the gains of restructuring – proved too great, and the deal was abandoned.

As the dust settles, analysts are suggesting that the bank with the comparatively easier task ahead is Commerzbank, and that most likely its future lies in foreign hands despite the government’s preferences for a domestic merger.

ING appears to be the frontrunner to buy it, given the Dutch bank’s existing retail operations in Germany through ING-DiBa and the indications that it might be prepared to move its headquarters to Frankfurt if a deal went through.

Italy’s UniCredit could also see potential upside by putting Commerzbank together with its German subsidiary HVB and creating a large SME and retail platform. Other banks in the frame could be Santander, BNP Paribas and Société Générale.  

With less than 5% of German bank assets, Commerzbank is large enough to be interesting to a foreign purchaser yet not so big as to be indigestible. If cultural and political issues can be overcome, the business logic is there.

Deutsche Bank, with close to 15% of assets and a large investment banking operation, is in a tougher position. Chief executive Christian Sewing has said that he wants the bank to be involved in European consolidation, but with many unresolved problems, Deutsche may not currently be the most attractive partner. While the bank reported a 65% net income uplift in the first quarter and kept to its cost targets, return on tangible equity is still only 3.6% (after evenly apportioning across the whole financial year, bank levies paid in the first quarter). This is low even by the current low standards of large international banks.

Shareholders were relieved when the Deutsche Bank/Commerzbank merger talks collapsed, but the uphill task for European banks in general, and German banks in particular, to get back to a steady state returns remains to be overcome.

Brian Caplen is the editor of The Banker. Follow him on Twitter @BrianCaplen

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