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German bankers have much to learn from the collapse of Credit Suisse in neighbouring Switzerland, but politicians, up in arms about an expected UniCredit/Commerzbank deal, must also change their mindset.
The political outcry in Berlin about Italy’s UniCredit increasing its stake in Germany’s Commerzbank is as telling as it is hypocritical. Both the social-democratic Chancellor Olaf Scholz and Germany’s influential Verdi workers’ union have rejected a deal, their decision determined by politics and power.
But this is no isolated event. Political machinations and lack of understanding of European economies by their key players are likely to shape not the just the future of the continent’s banks and wealth managers, but also preferred asset classes for investors.
What is truly shameful, however, is that supposedly free market-loving finance minister Christian Lindner and conservative opposition leader and candidate for chancellor Friedrich Merz (a former BlackRock executive) have opposed a UniCredit/Commerzbank deal for opportunistic, populist reasons, without any economic rationale.
Whereas Unicredit’s CEO Andrea Orcel certainly surprised the political establishment with his move on Commerzbank, his playbook is defined by established rules and regulations.
Lessons to be learned
The embattled German government certainly has plenty on its plate. It is busy enough with major turnaround challenges affecting ailing industrial groups Volkswagen and ThyssenKrupp, decrepit public infrastructure, and depleted armed forces, just to name a few.
Germany’s recent and expected economic performance, at the bottom of OECD rankings, remains badly in need of increased competitiveness through overdue structural reforms. Crucial in this context would be an efficient, competitive and profitable banking sector.
Key lessons can be learned from Greece and Portugal. After near-death experiences in the 2009/2010 European debt crisis, Athens and Lisbon had no choice left but to engage in structural reforms, resulting in drastically improved budgetary and economic performance.
Fortunately, the response from German media, corporate clients and consultants is far from hostile to a cross-border banking deal. It is, in principle, supportive of domestic and pan-European banking consolidation, focused on securing competitive products and services across corporate and retail banking and investment management.
The fact that Berlin has been caught sleeping at the steering wheel, during UniCredit’s stake-building scheme, demonstrates longtime ignorance and complacency about banking and financial matters in Berlin. After all, German banks, led by Deutsche, have consistently destroyed capital on a record scale.
In this atmosphere, there is little surprise with the reaction of Chancellor Scholz – rejecting a deal before thinking things through – complaining about the Italians’ aggressive style and claiming Commerzbank’s independence would serve Germany’s best interests.
Structurally under-valued
It’s important to place today’s events in a historical perspective. Over the decades, German universal banks have been run as largely closed shops of supervisory boards and senior executives’ vested interests, without focus on clients or shareholders.
As a result, they have remained structurally under-valued, underperforming and prone to accidents in times of international financial distress. German finance-watchers will recall Dresdner Bank being taken over by Commerzbank in the aftermath of the 2008 global financial crisis, repeated government-led bailouts of West LB and the UniCredit acquisition of HVB.
Europe urgently needs a full capital market and banking union for large and efficient capital raising, capital allocation and capital investments. Without that, Europe’s economic performance cannot be lifted to its potential, nor will it be possible to meet overdue investment needs in critical infrastructure and secure health and retirement financing.
Accident in waiting
If the German government is to become serious about aiding the economic success of its banks and their ability to finance entrepreneurs and businesses, they must address the unsustainable business model of Deutsche Bank’s still gigantic derivatives book – an accident-in-waiting in any future financial crisis.
The self-inflicted and entirely predictable Credit Suisse collapse should serve as a stark warning signal. The parallels between failing Swiss and German policymakers are only too obvious.
Banks, with their traditional corporate lending, have lost market share to new non-bank players and private markets developments. Just watch the growth rates in private credit demand by institutional investors, family offices and willingness of private banks to market these strategies to wealthy clients. This chase-for-yield can only be expected to accelerate further, with the inflation and interest rate cycle turning downwards.
Political deadlock
Upward movement of the stock prices of Commerzbank and UniCredit seems a positive indication of things to come. However, much will depend on whether UniCredit’s Mr Orcel can switch his style from financial speculator to value-creating financial industrialist. We also need to see whether Commerzbank’s incoming CEO Bettina Orlopp can leave behind Commerzbank’s legacy to become part of a performing solution outside of Berlin’s protectionism.
Germany has vast economic and capital market potential, but must move beyond ongoing political deadlock in Berlin.
The expected UniCredit/Commerzbank deal should prove a hugely positive development for the German, Italian and European economies and banking sectors and for clients and shareholders of both banks.
Beat Wittmann, chairman and partner, Porta Advisors, Zurich