Germany's Banking New King? DB Faces Tough Choices

**Unione di Banche Italiane (UBI) may acquire Commerzbank and is expected to create Germany's largest bank, surpassing Deutsche Bank (DB.US).

The market had speculated that Deutsche Bank might acquire Commerzbank, but Bloomberg columnist Paul J. Davies believes that Deutsche Bank's acquisition of Commerzbank makes no sense, and the union would also be dissatisfied with this, but buying shares might be a good idea.

Participating in the bidding would help Deutsche Bank protect its interests, or at least profit by raising the acquisition price.

After winning the auction of the shares held by the German government last week, UBI holds 9% of Commerzbank's shares.

The CEO of this Italian bank, Andrea Orcel, is expected to apply to European regulators for permission to acquire up to 30% of the shares of this bank, which targets small and medium-sized enterprises in Germany, and ultimately merge the bank with UBI's German subsidiary HVB.

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Philip Richards of Bloomberg Intelligence said that this deal will bring a stronger domestic competitor to Deutsche Bank in Germany and may lead to UBI's revenue in Germany surpassing that of Deutsche Bank.

Deutsche Bank cannot ignore this potential change in the landscape.

If Deutsche Bank reaches an acquisition deal, it may need to raise funds through a rights issue to support its balance sheet - given its still low valuation, this deal will be costly.

UBI's valuation is much higher, exceeding its book value by 90%, which is crucial for the value that both banks can obtain from the acquisition.

Citigroup analysts said that this deal will increase the earnings per share of the expanded UBI by 4%, but the earnings per share of the expanded Deutsche Bank will decrease by the same amount.

Another big issue is that Deutsche Bank and Commerzbank have many branches in the same places.

On the one hand, this means that Deutsche Bank can save more costs than UBI, but on the other hand, it means a huge political obstacle.

Five years ago, German unions strongly opposed the merger of Deutsche Bank and Commerzbank because it could mean up to 30,000 people losing their jobs.

The employee representatives on the supervisory board of Commerzbank are unlikely to welcome Deutsche Bank's acquisition because they have already warned of possible layoffs by UBI and called for a French bank to become a white knight.

This seems unlikely to happen: the main bidder, BNP Paribas, is in the process of acquiring the investment management department of AXA, and it has repeatedly stated that it is not interested in bank acquisitions.

ING is a potential bidder, but its CEO, Steven van Rijswijk, has said that he is more interested in small-scale deals.

Seamus Murphy, Managing Director of the independent research firm Carraighill, believes that Commerzbank's stock will perform strongly anyway, but he thinks it is better for Commerzbank to be acquired by UBI than to remain independent.

Murphy said: "Andrea Orcel has proven that he can create value by improving the operations of UBI and HVB.

The leadership of Commerzbank has not yet proven this to the same extent."

Davies of Bloomberg said that Deutsche Bank wants to participate in the integration of the European banking industry, but for now, it is better to stick to its self-improvement plan.

It is understood that Deutsche Bank has just resolved a series of costly issues related to the acquisition of Postbank, including IT failures, consumer complaints, labor disputes, and shareholder lawsuits.

Deutsche Bank agreed to pay about 350 million euros to reach a settlement agreement with more than 80 plaintiffs.

This will allow Deutsche Bank to release some of its previous provisions, and it is expected that pre-tax profits in the third quarter will increase by 430 million euros.

Davies also warned that the bank has little room for error in terms of profitability and capital levels.

The bank's situation is much better than in previous years, but its stock price is still a big discount from its book value, and there is a reason for this.

Deutsche Bank CEO Christian Sewing has said that the bank's first focus is on its own growth and profitability, not on the German government's plan to reduce its stake in Commerzbank.

Overall, Deutsche Bank faces the choice of whether to participate in the bidding for Commerzbank, and this decision will have a significant impact on its competitive landscape in the German and European banking industries.

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