Spread betting – Is Deutsche Bank the mother of all takeover targets?

Shares in Deutsche Bank rose mid-week amid rumours in German media the embattled bank is looking at a tie-up with Germany’s number two lender, Commerzbank.

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Deutsche chief executive John Cryan denied any such discussions had taken place, stating that the bank was instead looking to get smaller. But could downsizing just be the precursor to a merger? It did later emerge that preliminary discussions had taken place between the two banks, but these were broken off early because they decided it was not the right time to combine.

On the same day as the report about Commerzbank, Cryan stoked the rumour mill further by saying that the banking sector needs more mergers. The hint was seized upon by investors with shares in both Deutsche and Commerzbank rising on Wednesday.

Deutsche is a very interesting takeover target. It trades at about a quarter of book value and its shares are now worth a tenth what they were in 2007. In the last year its shares have halved in value, while it posted a €6.8bn loss for 2015 - low-hanging fruit for those who can reach.

The question is who might step up. Would any bank be prepared to get into bed with what the IMF calls the riskiest globally systemic institution?

One potential contender is Barclays. Last year executive chairman John McFarlane indicated his support for mergers in general, calling for a European champion to counter the growing dominance of the big US banks. Post-Brexit, there is an added incentive for a UK-based bank to join forces with a big European player. If UK-based banks lose their so-called passporting privileges there could be strategic value in some kind of cross-channel tie-up.

Creating an investment and trading giant like this is not without its troubles. Capital requirements could weigh on such a behemoth, while risks could increase with scale and regulatory hurdles could also be significant. One would also have to doubt whether the German government would even let Deutsche be acquired.

But consolidation is coming in one form or other. Technology and regulation costs are rising for banks and margins are being squeezed by persistently low and negative interest rates. Trading revenues are also on the decline. In any industry this would be a sign that deals are imminent.

Cryan is right to suggest mergers are needed. The question is how and when. First mover advantage could be vital. There are plenty of banks in Europe that are targets, but none perhaps with the cache of Deutsche.

Caution is needed, of course. The ill-fated acquisition of ABN Amro by RBS ahead of the financial crisis should serve as a warning to any banker looking to rush in. Nevertheless, the industry in Europe looks ripe for some consolidation.