Geoff Cutmore's Morning Thoughts - Commerzbank and Dresdner - Geoff Cutmore - Morning Thoughts Blog - CNBC Europe

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Sep.01

7:02 AM ET

Monday, 1 Sep 2008

Another Banking Business Model Crumbles

Posted By:Geoff Cutmore

Topics:Germany | Investment Strategy | Economy (Global) | Europe | Stock Market

Sectors:Banks

A spokesman for the german Finance Ministry declared Monday morning the deal to combine Dresdner and Commerzbank a win for the country’s banking industry.

No surprise given the well understood preference in Berlin for national champions. But I don’t think the marketplace agrees with the spokesman's assessment of the story. If the decline in Commerzbank's share price this morning tells us anything about investor sentiment towards the deal the market thinks they overpaid.

Our faceless spokesman could also take a lesson on candor and honesty from the British Chancellor Alistair Darling, who this last weekend confessed the UK economy is going to get very, very sick. This deal is wrought from the failure of an earlier domestic banking alliance -- that at least should have tempered the desire to celebrate.

COMMERZBANK COVERAGE

Allianz bought Dresdner seven years ago for 23 billion euros and is set to get well under half of that back. Allianz shareholders ought to be asking some difficult questions about the bonuses paid and the hubris generated by the original transaction.

Typically the deal is also not as clean as some Allianz shareholders might have hoped. Far from the insurer severing its exposure to Dresdner, as part of the deal Allianz will hold a stake of nearly 30 percent of Commerzbank. They had better hope Commerzbank's management has better ideas for Dresdner than the last owner.

How does it look for Commerzbank? Well, for what it's worth, Commerzbank now challenges Deutsche Bank for bragging rights as the largest German bank, at least in terms of retail custom. But shareholders could be forgiven for asking why precious capital is being spent to grab market share when profitability across the industry is in decline.

And why pay 9.8 billion euros when Dresdner's sticker price could get cheaper? Surely there is not a political dimension to timing and price? Shareholders rarely do well when the politicians get involved.

The deal raises a bigger question about future revenue drivers in the banking industry.

Investment banking is withering on deleveraging, retail banking is constrained by consumer incomes, mortgage lending hurt by the property slowdown, and asset management hurt by falling asset prices. Banks have for years lusted after the notion that they could act as agents and cross-sell insurance and other financial services through their retail outlets (the so called bancassurance model) – but Monday's sale of Dresdner again shows the model is not easily created.

By selling Dresdner, Allianz is acknowledging the failure of its attempt to form a successful bancassurance business. Investors looking to pick up financials on lowered prices need to accept this is one more revenue stream that is rolling over.

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