LONDON, April 25 (IFR) - Deutsche Bank’s bonds gapped wider after its board ruled out a potential tie-up with Commerzbank, but the longer-term impact on the bank’s strategic direction - and hence its spreads - divided opinion among credit investors.
After nearly six weeks of talks, Deutsche Bank announced on Thursday that a merger would not have created sufficient benefits to offset the additional execution risks, restructuring costs and capital requirements associated with such a large-scale integration.
Deutsche’s Additional Tier 1 and Tier 2 debt initially fell over 1.5 points in cash price terms, according to Tradeweb data.
German government officials had been pushing for a tie-up to create a national banking champion and mitigate the travails of both institutions since the financial crisis. The prospect of a merger met fierce opposition from the workforce, however.
“I think it’s a massive setback for them, as it’s hard to see an alternative plan – I’m surprised spreads aren’t weaker in Deutsche Bank,” said Richard Thomson, an analyst at Janus Henderson.
“[There are] no triggers for DB in the short term, but weak earnings, high costs, high leverage and high funding costs will remain the focus of many investors.”
Deutsche said it would continue to review all alternatives to improve long-term profitability and shareholder returns, but it is trying investors’ patience: as BNP Paribas analysts point out, the deal’s collapse will force the bank to present its fifth turnaround plan since 2015.
The market’s attention is now likely to refocus on the bank’s standalone credit quality - a performance negative for its senior paper after the strong performance this year, said Suvi Platerink Kosonen, a credit analyst at ING.
“There is little confidence in their current strategy from the markets, and now that the merger talks have been ended, they are likely to be pressured to come up with a new strategic plan,” she told IFR.
Deutsche priced a €750m 2.625% Feb 2026 senior non-preferred bond at swaps plus 230bp on February 5. That was trading close to its tights in the low 190s at Thursday’s open, before widening to 200bp over.
“NOT THE ONLY WAY”
Others were more optimistic, arguing that the bank is better positioned than many make out.
“There was no desperation from their side. Capital is fine - I never understood why people were calling for a capital raise – the trouble is still on the earnings side,” said Michael Huenseler, managing director at Assenagon Asset Management.
“The merger wasn’t the only way out, but the DB board needs to convince their investors that they can make it on their own and there is some potential left.”
In contrast to its bonds, Deutsche’s shares traded up - by 3.6% by 10:05am.
That seemed to reflect better-than-expected preliminary earnings in which it said it expects to post a first-quarter net profit of about €200m, beating analysts’ expectations of €29m. Its Common Equity Tier 1 ratio is expected to be approximately 13.7%.
Still, whether Deutsche can bolster its revenues on a long-term basis remains to be seen, particularly since further cost cuts could further erode the franchise.
“The reported revenue attritions of c. €1.5bn could have been the straw that broke the camel’s back,” said Filippo Alloatti, senior credit analyst at Hermes Investment Management.
“That would have compounded the chronic difficulties of Deutsche to grow its revenue base.”
BACK ON THE MARKET
The termination of talks will also avoid a lengthy paralysis of both institutions that an integration would likely have entailed.
But it does mark a set-back for the consolidation of Germany’s highly fragmented banking sector, where profitability remains under intense pressure across the board.
Commerzbank’s fate poses another question. Unlike Deutsche’s, its bonds performed following the news, if only slightly - its spreads rallied up to 5bp in the case of both senior and Tier 2.
“Commerzbank has tightened on relief that DB isn’t likely to be its partner,” said Janus Henderson’s Thomson.
Its merger with another European institution is seen as highly likely, however, with ING and UniCredit touted among the potential candidates.
“This should be quite supportive of the spreads of the Commerzbank paper, as any of these combinations is likely to result in a stronger bank than the DB tie-up,” the BNP Paribas analysts said. (Reporting by Alice Gledhill, editing by Helene Durand, Philip Wright)