Germany Keeps -- For Now -- Its Stake in Commerzbank. Time for Reflections

On September 20, 2024, the German government announced that it will not sell any additional shares of Commerzbank (the bank), until further notice. As of today, the government holds 12% of Commerzbank's shares. In addition, the government also highlighted that the Bank's strategy is geared towards independence.

This decision followed the sale of a 4.49% stake in the bank on September 11 through an accelerated book-building, which has seen the allocation of these shares to UniCredit Group (UniCredit). On the same day, UniCredit announced that it has reached a 9% stake in Commerzbank, after acquiring the remaining shares in the open market. Talking about the rationale and future of this investment, Mr. Orcel, UniCredit's CEO, said the consolidation with Commerzbank was one of the options. Subsequently, on September 23, UniCredit said that it has made the regulatory request to increase its stake up to 29.9%, and that it has entered into financial instruments relating to circa 11.5% of Commerzbank shares from the market, bringing its total position to approximately 21%. Physical settlement under the new financial instruments may only occur after obtaining the required approvals.

The decision of the government to halt, for now, the sale of its remaining shares in Commerzbank, in our view, will likely give time to explore various options, including a negotiation with UniCredit, or keep Commerzbank independent. The government's presence in the bank's shareholding and the interest from a foreign bank make any transaction more sensitive to the eyes of the public opinion.

In our view, a deal with UniCredit is still possible, however any transaction would be more difficult without the backing of the German government and therefore not likely to materialise over the short-term. In the interim, we expect UniCredit to assert its influence on the bank as key shareholder.

In the event of a tie-up, the negotiation will likely focus on key aspects related to governance and job security. In our view, the government will seek to secure a prominent role for Germany. After all, the combination with HypoVereinsbank (HVB) would not only result in a larger German bank, but in case of a merger between the two groups, Germany would also become the largest market of the combined entity, followed by Italy. The German government will also seek commitment to protect access to credit for SMEs, and jobs. In recent days, concerns over potential job losses and reduced financing options for companies have prompted unease amongst some national and local politicians as well as some entrepreneurs and unions.

These events are taking place at a crucial time for Germany and Europe. The German economy has been struggling particularly since the start of the Russia-Ukraine war. Meanwhile, the coalition government is facing increasing pressure after the unfavorable outcome in recent regional elections prior to the general elections in 2025. At the same time, Europe is facing challenges to boost its competitiveness, as well as lagging in progress with its capital and banking union.

The developments around a potential merger between Commerzbank and UniCredit will have significant implications on the prospects of the future financial integration in Europe. Banking mergers are complex transactions and their success is not always granted. Cross-border mergers are even more difficult as they face political obstacles, national pride and regulatory fragmentation. A banking union could create more fertile conditions for such transactions. Moreover, at this point time, a large combination could spur progress in that direction.