After six sleepless weeks of long-lasting and ultimately fruitless merger talks, the difficult turnaround for Christian Sewing and Martin Zielke has just begun.
Given the flickering discussions between Deutsche Bank and Commerzbank, executives from both lenders must find compelling answers to the thorny issue investors, regulators, analysts, and employees are asking: what's next?
Davide Serra, head of Algebris, an asset manager, said the collapse of the talks was "a win-win situation" for both banks. "They are better off implementing their sections. Both have to cut costs, but it's easier and cheaper to do it organically, "said Serra.
However, it is not a credible option to work as usual. "The fact that they have started talks suggests that the current strategies are not working towards the expected goals," said Anke Reingen, an analyst at RBC Capital Markets.
The two banks are deep in the financial crisis and their shares are trading at a sharp discount to the value of their assets. Investors fear that their plans to convert profits to investor-targeted levels are unrealistic as they face negative interest rates, weak economic growth and fierce competition both domestically by state-owned peers and internationally emerging rivals of Wall Street.
Commerzbank, which had abandoned its growth targets in February, is now being surrounded by foreign applicants. Italy's UniCredit and the Dutch lender ING have registered their interest in the smaller of the two Frankfurt banks.
"I'm assuming that Commerzbank is being bought by another European bank, and it's a question of 'when' rather than 'if', said Filippo Alloatti, an analyst at Hermes Investment Management.
For Deutsche Bank, options are less easy. There are few opportunities for Germany's largest lenders, apart from a profound cut in its huge but barely profitable investment bank. Deutsche Bank intends to accelerate the restructuring of its weak retail businesses. However, this will not show significant results before 2021.
"The question [them] How far do you have to go in further restructuring? "JPMorgan analyst Kian Abouhossein said. "They have no choice but to address some below-average assets," adding that US trading and the trading desk for equities are obvious candidates as they have an estimated pre-tax loss of EUR 200 to 300 million a year cause.
The lender released some details on first-quarter results on Thursday, showing that earnings were above expectations. However, the highly competitive corporate and investment bank had to accept 13 percent less revenue than in the previous year.
Two leading German executives told the Financial Times that the lender was committed to raising the return on equity to more than 4 percent by the end of the year, compared to just 0.4 percent last year.
However, none of the 17 main analysts covering the company believe this is possible. On average, a return of a meager 1.5 percent is expected this year.
"As our preliminary results of the first quarter show, we are moving in the right direction on our own," Sewing wrote in a memo to the employees. He stressed that the net profit in a difficult market environment over the first three years increased by more than 65 percent months of the year.
"This is just the beginning for Deutsche Bank," said Daniele Brupbacher, an analyst at UBS, adding that "a shrinking scenario for a major investment bank is now the most likely scenario for a radical strategic change."
Regulatory authorities and policymakers in Berlin had urged Deutsche Bank to negotiate a deal with its smaller rival at the end of 2018, after mounting concerns that they were trapped in a downward spiral of low equity prices, rising financing costs and declining revenues.
However, the debt markets reacted badly to the news that the talks had ended. Deutsche Bank's credit default swaps – derivatives that pay off in the event of a company default – rose after the announcement.
One reason for the merger was the hope that Commerzbank's large deposit from retail deposits could help reduce German borrowing costs and strengthen the competitiveness of its investment bank.
In parallel to the merger talks with Commerzbank, the German working group had examined other options in the event of a no-deal outcome, said a person who had dealt with the matter.
Deutsche is considering a possible merger of its asset management activities with those of Swiss UBS in order to create a dominant group in the European investment industry.
In itself, however, this deal would barely solve the Bank's most pressing problems, as asset management operations do not generate enough profits to move the needle to a lender with assets of € 1.4bn.
Executives also seek to put more unwanted assets into a "bad bank" to focus investors on the potential of a tidy business. Major shareholders as well as the regulators of Deutsche Bank have asked Mr. Sewing to further downsize the corporate and investment bank, which still accounts for half of the turnover.
One person, who was briefed on German internal discussions, confirmed that the sale of up to € 20 billion in investment banking assets was considered – a small amount compared to the total risk-weighted assets of € 350 billion.
At the moment, some senior German bank managers are playing down the need for a deeper strategic reorientation. "Today's decision allows us to focus all our energy on the strategy we introduced in April 2018 to make the CIB more profitable by cutting costs and being more intelligent about where we provide resources," said Garth Ritchie. Head of the commercial and investment bank of the Germans. wrote in a note to the staff.
Another senior executive who asked not to be named said the top executives knew how eager investors would be about the lenders next steps, and they would respond "in due course".
The executives said, "We talked about implementing our existing plans, and we talked about alternatives to speed up those plans." Some analysts warn that Deutsche Bank will have to raise more capital for the fifth time in nine years if The markets could get mad or if they decided to radically shrink their investment bank.
However, the bank insists that it is adequately capitalized at a common tier Tier 1 ratio of 13.7 percent above the regulatory minimum.
The Federal Government will continue to play an important role in shaping the German banking system. As a 15 percent shareholder of Commerzbank, it is the key to consolidating the bank.
Officials in Berlin said that the government would disapprove of any offer from an Italian lender like UniCredit to Commerzbank – one of the top lenders for small and medium-sized businesses in Germany.
The politicians fear that a potential fiscal crisis in Italy could affect the German corporate sector – as evidenced by the large exposure to Italian government bonds of a bank like UniCredit.
A Dutch or French buyer of Commerzbank – such as ING or BNP Paribas – may be more politically acceptable to policymakers in Berlin, especially if the foreign lender has relocated important parts of its business to Frankfurt.