Breakingviews - Deutsche CEO will dust off Commerz merger in 2021

Banners of Deutsche Bank and Commerzbank are pictured in front of the German share price index, DAX board, at the stock exchange in Frankfurt, Germany, September 30, 2016.

LONDON (Reuters Breakingviews) - Christian Sewing has had a surprisingly good year, but 2021 will be harder. The chief executive of 17 billion euro Deutsche Bank will most likely have to abandon his medium-term profitability target. Reviving a merger with rival Commerzbank is the most logical Plan B.

A pandemic-fuelled trading boom, relatively low loan losses and heavy cost cuts have helped Sewing in 2020. Deutsche’s shares are up 17% this year, while the Euro STOXX Banks Index is down 45%.

In 2021, however, it will become clear that Sewing’s targeted 8% return on tangible equity for 2022 is out of reach. It would require Deutsche to generate 24.5 billion euros of revenue, according to Breakingviews calculations based on Sewing’s own cost targets and analysts’ estimates for loan losses. Even if investment banking income holds steady - which is unlikely as volatility fades - the rest of Deutsche would have to grow at a 1.1% average annual rate. Analysts expect the top line to shrink instead.

Sewing’s alternatives are limited. There will be little fat left to cut by 2022, since he has pledged to reduce costs by one-quarter from 2018’s level, and exited businesses such as equities trading.

Dusting off the aborted 2019 Commerzbank deal would help. A merger could generate 2.9 billion euros in annual savings, based on the 12% of combined expenses targeted in the recent Caixabank and Bankia merger. Add that to the two banks’ forecast net income, and the new group’s ROTE would reach 7% in 2022, according to Breakingviews calculations based on Refinitiv data. A solo Deutsche would churn out just a 3.1% return that year, analysts reckon.

Sewing’s cleanup makes his bank a more appealing partner than in 2019, when the lenders called off talks citing execution risks and capital requirements. Deutsche has shed 27 billion euros of risk-weighted assets through its bad bank, and should finally generate a profit next year. European regulators have also made it clear they won’t necessarily raise capital requirements after mergers.

Finally, Commerzbank’s equity value has slumped since early 2019. Assuming a 30% acquisition premium, Deutsche shareholders would own 70% of the new bank, versus 60% in early 2019, giving them more of the upside. Sewing’s revamp might not deliver the hoped-for returns. But at least it’s making Deutsche fit for a deal.


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