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Western EuropeOctober 5 2008

Merger fever hits Germany’s big five

The Dresdner and Postbank deals look like big news and might increase competitiveness, but what effect will they really have on the German banking landscape? Writer Michael Marray.
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By the slow-moving standards of the German banking industry, the past two months have seen a hectic level of merger and acquisition activity, with the €9.8bn acquisition of Dresdner Bank by Commerzbank rapidly followed by Deutsche Bank paying €2.79bn for an initial 29.75% stake in Postbank.

Some observers would have liked to see a more fundamental change in the German banking landscape, perhaps including the entry of a big foreign bank such as Santander, and view the net effect of these transactions as simply solidifying of the position of Commerzbank as number two behind Deutsche Bank.

However, the more dynamic financial services models in the US or UK have never enjoyed much support in Germany. And the current bout of turmoil involving institutions such as Lehman Brothers, Merrill Lynch, AIG and HBOS will only serve to strengthen the view from Germany that gradual consolidation within the banking sector is the right way forward.

Cost savings

The key to the acquisition of Dresdner Bank, which is being sold by the Allianz Insurance Group, is the cost savings associated with the reorganisation of the retail branch network across Germany, as well as deep cost cutting at investment bank Dresdner Kleinwort.

About 340 of the combined 1540 retail branches will be closed. At the time of the merger, the two institutions had a total headcount of 67,000, and Commerzbank has said that it will reduce this by 9000 in what it describes as a socially responsible way.

All but €1.6bn of the purchase price is in the form of shares, which means that Allianz will be left with a 30% stake in the enlarged Commerzbank, as well as a long-term co-operation agreement on the distribution of insurance and investment products. In addition, parts of the Commerzbank asset management have been sold to Allianz for €700m. In early September, Commerzbank completed a €1.1bn share offer to part-finance the deal, which was five times oversubscribed.

Private banking is one area where the Dresdner acquisition will strengthen the position of Commerzbank, bringing in a good franchise of high net worth customers looking for wealth management expertise, and buying structured products. Small and medium-sized enterprise (SME) lending will also be strengthened.

Scaling back

The significance of commercial real estate lending for Commerzbank will decrease after the two balance sheets are merged. But the comparatively stable public finance activities will still be a focus, as will the building up of an already strong presence in central and eastern Europe.

The activities of investment bank Dresdner Kleinwort will be drastically scaled back after the takeover. A global investment banking presence was at one point a goal of both Commerzbank and Dresdner Kleinwort, which at one point changed its name to Dresdner Kleinwort Wasserstein after it acquired Wasserstein Parella as part of its investment banking push.

Dresdner drain

But Dresdner never made the breakthrough to become a first division investment bank, and was a drain on the resources of an increasingly impatient Allianz. Meanwhile, Commerzbank Securities had its own ­ambitious investment banking plans, and hired new staff in London, New York and Tokyo in 2000 and 2001. But in late 2004 the bank downscaled its investment banking effort, and the Commerzbank Securities name was scrapped. Today that leaves Deutsche Bank as the only German institution with a heavyweight presence in global investment banking.

Commerzbank Corporates & Markets is currently an integrated corporate and investment banking group whose businesses include capital markets activities in credit, equities, interest rate and foreign exchange, with a strong focus on derivatives and structured products. Parts of Dresdner Kleinwort will be integrated, but much of it will be wound down.

Buy or be bought

“Commerzbank had two possibilities, which was to either acquire another bank or eventually be bought itself,” says Olaf Kayser, investment analyst at Landesbank Baden Wuerttemberg in Stuttgart. “So the takeover of Dresdner Bank makes sense for them strategically, though the price paid and the dilution effect of the deal leaves open how beneficial the deal will actually be for them.

“Commerzbank buying Dresdner is a cost-cutting story, whereas Deutsche Bank acquiring a stake in Postbank is a revenue story,” he adds.

But given that it is a cost-cutting story, not everyone is convinced that Commerzbank has the management capability to pull off the trick of successfully integrating units, taking the best bits, and realising the projected cost savings.

“The restructuring to achieve cost synergies will probably take longer than they forecast,” says one Frankfurt banking analyst. “I am quite sceptical in the short term. In fact the real positive earnings impact for Commerzbank may only be seen in 2012.” Commerzbank made record profits of €1.9bn in 2007 despite some subprime-related writedowns.

“In the long term we see the upside potential of the acquisition, as a consolidation play which will strengthen Commerzbank’s market position in the Mittelstand, private customer and corporate banking segments, but in the short term the execution and integration risks outweigh the benefits from a ratings point of view,” says Michael Steinbarth, analyst at Fitch Ratings in London. As a result, the ‘A’ long-term issuer default rating of Commerzbank has been placed on ‘rating watch negative’.

“With regard to the overall impact on the German banking industry, some consolidation is clearly needed, and both Commerzbank and Deutsche Bank will increase their market share with their acquisitions,” Steinbarth adds. “But the savings banks and co-operative banks will not see much impact in the near future, and still have more than 50% of the German deposit base, and closer to 70% for savings deposits.”

In fact many analysts are more positive about the Deutsche Bank acquisition which, only a few weeks after Commerzbank seemed to be catching up, pulls it further in front of its rival.

A controlling stake

In mid-September, Deutsche Post (which was privatised in 2000) announced that it is selling a 29.75% stake in Postbank to Deutsche Bank. There is an option for Deutsche Bank to buy another 18% within 12 to 36 months after the initial transaction closes, and an option for Deutsche Post to sell another 20.25% between 21 and 36 months after closing. So a move by Deutsche Bank to eventually control Postbank is expected, though it intends to keep the Postbank brand.

But even with Postbank controlled by Deutsche Bank, the German banking industry will still look much the same as it did 12 months ago.

“The big private banks may now be a little bit more competitive, but overall it does not change very much,” is the verdict of one observer.

It is notable that the sale of two of the big five private banks (HVB, Commerzbank, Deutsche Bank, Postbank, Dresdner Bank) has been to two institutions from the same list, rather than having a foreign bank such as Santander gain a foothold in the market. Santander was one of the bidders for Postbank. HVB is already foreign-owned, being part of the Italian UniCredit group.

Foreign buyers wanting to access the German market have been confined to smaller deals. Earlier this year, Crédit Mutuel of France acquired the Citigroup German retail network for €4.9bn, with Citigroup needing to raise cash because of the subprime crisis. And SME lender Deutsche Industriebank IKB was sold to US private equity house Lone Star after running into trouble related to big subprime asset-backed securities losses.

Nothing new

In fact the current re-ordering of the banking landscape could have happened almost a decade ago. Back in 2000, Dresdner held talks with Deutsche Bank, which fell through. The same year, Dresdner reported that discussions with Commerzbank were proceeding positively, but these too fell apart.

Allianz then decided to increase its stake in Dresdner and assume control. Seven years later it has found a solution to what became a management headache and a drain on its financial resources.

But German politicians and regulators probably don’t care too much about the glacial pace of change, and are happy to see domestic takeovers rather than foreign acquisitions, and a gradual consolidation of strong, well-capitalised banks with solid deposit bases, especially at a time when few people are flying the flag for the Wall Street financial services model.

Further consolidation is expected among the various Landesbanks, savings bank and co-operative banks, but analysts expect this to happen within the public sector, rather than a private sector bank making a big public sector acquisition.

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