Commerzbank gobbles up Dresdner

In the biggest German banking merger in history, Commerzbank, the third largest in Germany, has reached an agreement with Allianz to buy its banking subsidiary Dresdner Bank, Germany’s second largest, beating out an alleged better bid from state-owned China Development Bank (CDB). This is an historic merger with wide-reaching implications for the German and European banking sectors.

First and foremost, this merger of equals is about banking consolidation in Germany. But it also spells an end to German international banking expansion and puts the financial supermarket/bankassurance business model seriously into question.

Domestic concerns

Over-banking Germany is a problem, there are too many lenders and too many branches, leading to low returns on assets. The Dresdner-Commerz deal is expected to mean 9,000 job losses, much of which is in Germany’s crowded retail banking sector. Germany’s retail sector is dominated by state-owned savings banks that have absolutely zero profit incentive.

What is especially interesting about this deal is that it was approved despite reservations from workers’ representatives on both Allianz’s and Commerzbank’s boards. I reported earlier in my post Dresdner Bank: looking for suitors that the trade union Ver.di had indicated it was opposed to the deal and favored the higher CDB offer. Obviously, German economic nationalism was an issue in that it was considered unthinkable that a state-owned Chinese bank would acquire Germany’s second largest bank. It’s fine for IKB, a smaller, less well-known bank to be acquired by an American private equity firm, which are much derided in the German press and German politics. It was also fine in 2005 for an Italian bank, Unicredito, to acquire the combined 4th and 5th largest German banks HVB despite German condescension toward Germany. But, it is clearly not fine for a state-owned Chinese bank to acquire a venerated German financial institution.

Internationalism

In addition, dating back to the1990s, there had been a move by the top-flight German banks to expand internationally. While the ill-fated IKB’s poor speculative bets in the American subprime market are perhaps the most well-known example of German finance’s move to expand outside the domestic market, the list of German banks looking to move out of the low-profit retail sector into international products and markets is large: Deutsche Bank, Commerzbank, Dresdner Bank, Hypo Bank, Vereinsbank, and West LB were the principal contingent of expansionists. That list has since thinned to include only Deutsche Bank.

Munich-based rivals Hypo Bank and Vereinsbank, weighed down by poor investments in the former East Germany’s property bubble of the 1990s and a sluggish German economy, merged in 1998. This was the last big German banking merger. The new combined company, HVB, was purchased subsequently by Italy’s Unicredito in 2005, despite raising German economic nationalistic hackles. HVB have long since pulled back from international expansion.

Düsseldorf-based Westdeutsche Landesbank (West LB) has always been known as the most aggressive and sophisticated of the German State Banks (Landesbanken). Located in Germany’s industrial heartland of Nordrhein-Westfalen, they considered themselves a breed apart. However, they were badly burned in the recession following the stock bubble of the late- 1990s and in the present ‘subprime’ crisis. They too have been chastened.

That leaves the Frankfurt-based triumvirate of Deutsche Bank, Commerzbank and Dresdner Bank to pick up the slack. However, the fact that Allianz decided to go with Commerzbank’s offer over the CDB offer is down not only to economic nationalism but also to a desire by Commerz and Dresdner to pull back from the internationalism that has burned many a German bank — especially investment banking.

British newspapers (still fretting about the disintegration of an independent British merchant banking sector) have noted that the merger will mean large cuts in Dresdner’s investment banking arm as there is considerable overlap with Commerzbank there. This means lots of job losses at Dresdner Kleinwort Benson, the British merchant Bank purchased during the halcyon days of German banking expansion. Ultimately, it will spell the end for both the Dresdner and the Kleinwort Benson name overseas.

In five years time, Deutsche Bank may be the only German bank left with a bulge-bracket international banking presence. What this means for the profitability of German banks is unclear.

Financial supermarket banking model

The so-called financial supermarket/bankassurance model was led by Sandy Weill, head of the Travelers insurance group which bought Citicorp in 1998. The financial supermarket could offer insurance, credit cards, mortgage lending, wealth management/ private client services, retail brokerage, investment banking, equity and debt capital markets, foreign currency dealing and accounts and on and on. The premise was to market a soup-to-nuts panoply of financial services to customers, generating increased revenue from the cross-sell opportunities. The problem is: it doesn’t work.

Citigroup, UBS, and Allianz are all examples of giant financial institutions offering a full array of products to their institutional and individual client base. But, their giant unwieldy bulk made them difficult to manage and time bombs of risk management. All of these institutions have been major casualties of the banking crisis.

While the Commerzbank-Dresdner Bank merger will ultimately be a net benefit for the German banking sector, it is another sign that economic nationalism is on the rise globally. It also could be the final nail in the coffin for German international banking expansion and giant financial supermarkets.


Originally published at Credit Writedowns and reproduced here with the author’s permission.