Pick up our latest report here:
Join our Larry McDonald on CNBC’s Trading Nation, Wednesday at 3:05pm ET
Pick up our latest report here:Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here
Deutsche Bank and Commerzbank Confirm Merger Talks
Wall St’s oldest secret, the merger of two of the world’s most over-levered financial institutions came out of the closet today. Deutsche Bank and Commerzbank faced concerns from workers unions, Chancellor Angela Merkel’s office and top shareholders on Monday after confirming merger talks. How much capital would the German taxpayers have to put up is the question on everyone’s mind?
The concerns underline the obstacles to combining the banks, which confirmed talks about a tie-up on Sunday following months of pressure from Berlin, which has pushed for a deal amid concerns about the health of Deutsche Bank, which has struggled to sustain profits since the 2008 financial crisis.
German GDP: $3.6T
*Enterprise value of the combined entity is equal to 7.1% of the country’s GDP.
Need for Equity
The deal has yet to go through due to the political pushback given the lack of equity relative to the massive amount of debt in the combined entity. In our view, the merger needs to get to at least $50B in equity for regulators to accept it. This would mean a near $22B capital injection from the German Government. Keep in mind Germany is the one holding fellow EU members’ feet to the fire on fiscal spending, putting them in a further precarious position.
Leverage vs. US Banks
The New (Merged) Deutsche / Commerzbank:
Debt to Equity Ratios
The German government will probably (must) inject some state capital into the merged bank and retain an equity stake, but it would have to be substantial. We would assume the merged entity needs to at least double its equity capital.
Deutsche Bank AG: 92k
Commerzbank AG: 50k
Another obstacle for the acceptance of a deal is the jobs it would need to destroy. The merger takes out 20-30k here, unfortunately. After a decade of downsizing, financials are still downsizing.
Global Bank CDS
Credit risk in Europe has tightened substantially since the beginning of the year. However, the CDS in Deutsche and Commerzbank remains well above the banks in the US. Pick up our latest report here.