Commerzbank reported better than expected results yesterday. Now, “better than expected” doesn’t necessarily translate to “good”, with Commerzbank once again seeing top line revenue pressure from the low interest rate environment and intense competition in the over-banked German market. Add a somewhat bloated cost base, and you have the archetype of a commercial German bank – one that trades at a low multiple-to-book value and generates a return on equity that doesn’t cover its cost of equity.
Following the failed merger discussions with Deutsche Bank, M&A rumours surrounding Commerzbank have continued unabated. The bride does have some attractions – it’s trading at a deep discount to its book value, offers access to the largest economy in Europe and potentially – to the right suitor – material cost synergies.
Separately, and importantly, there is also a very keen match-maker. Indeed, the ECB, in its banking supervision role, views banking consolidation as a way of strengthening the wider European banking system, helping in particular with the on-going issues of deep market fragmentation and cost (in)-efficiency.
Will the suitors show their hands? The prize is undoubtedly attractive, especially for banks like Unicredit, ING or BNP that have large in-market operations and should in theory extract better synergies from a tie-up, especially under the auspices of a keen match-maker.
On the other hand, will everyone – and in particular some people based in Berlin – view such a proposal positively? And how many banking tie-ups have lived happily ever after?