,
18 tweets,
5 min read
Read on Twitter
The social cost is likely to be very high (think 20,000 jobs.) The government must be really desperate about the situation of Deutsche to push for that deal!
Is it a good deal though? German banking M&A is notoriously difficult, there are a few horror stories (Dresdner, HVB…) and even in Excel land, the maths are not great – that’s even if you make bold assumptions on synergies.
The problem is that funding cost synergies will be easy, but true costs synergies will be hard to achieve and the capital that needs to be raised will be raised at extremely depressed Price to Book ratios.
This is why you’ll hear chatter of selling DWS (the profitable asset management business), maybe to Allianz, but this would be another case of DB selling what makes money to shore up what does not. A very risky strategy imo.
Also the sale of DWS could be a competition nightmare considering the large market share in Germany.
Worth pointing too that the deal is far from done: DB is likely to pay in shares, and if investors don’t like what they see, DB’s price could fall and jeopardize the deal. It wouldn’t be the 1st time that a similar deal collapse.
Even with the help of KFW – yes, it seems KFW (a state bank) will take part in a capital increase. Some have already screamed “Bailoooooooout”, but I think it’s far from a bailout. It’s more French-style state capitalism
Where the government wants more influence in economic and business matters and national champions – see the 2030 National Industry Strategy from BMWi which openly criticizes competition EU law and names DB as a national champion.
Does this state support mean that credit risk and systemic risk are lower? Not so sure because as we’ve seen in Italy, state support means it’s easier to recapitalize the bank (see also Caixa Geral in Portugal) but at the expense of creditors.
Since BRRD kicked in, State support is a double-edged sword.
In terms of intrinsic credit risk, though, I believe the combined entity would do a bit better : slightly higher profitability, slightly more diversified businesses and more capital, if only because they’d be up one notch in the GSIB list.
(Fwiw the market clearly agrees with this considering the jump in AT1 bonds)
Finally, an “amusing” one for the geeks: a very large part of the financials of the deal rely on the regulatory treatment of the negative goodwill the deal would generate (we’re possibly talking of 15-20bn€!)
Positive goodwill is deducted from CET1, but negative isn’t – which does not make any sense if you ask me. Why is that ? Because when the CRR was drafted nobody thought of that so the wording is vague.
In the past some supervisors (e.g. the French one) had clarified that of course negative goodwill didn’t make CET1, but this was outdated by the CRR and the SSM finally decided to authorize it; mostly to help Italian consolidation.
Such a huge amount for such a prominent deal could trigger legitimate questions about this - and honestly, I think the deal does not fly without negative goodwill trick. So watch this space !
