FILE PHOTO: Banners of Deutsche Bank and Commerzbank are pictured in front of the German share price index, DAX board, at the stock exchange in Frankfurt, Germany, September 30, 2016. Picture: REUTERS / KAI PFAFFENBACH
FILE PHOTO: Banners of Deutsche Bank and Commerzbank are pictured in front of the German share price index, DAX board, at the stock exchange in Frankfurt, Germany, September 30, 2016. Picture: REUTERS / KAI PFAFFENBACH

London — Deutsche Bank is facing resistance to its merger plans with Commerzbank from top Qatari shareholders, four people familiar with the matter say.

The investors are concerned that a deal would dilute their holdings if Deutsche Bank is forced to raise equity in a share sale to help fund the deal, the sources said. The Persian Gulf nation is also seeking to negotiate other concessions before it backs the deal, the people said.

Deutsche Bank shares have slumped by about two thirds since Qatar first invested about five years ago. The discontent among key shareholders adds to widening opposition to the deal, which Germany sees as a way to ensure financing to the country’s export-oriented economy during a downturn.

Labour representatives on Deutsche Bank’s supervisory board say a merger would fail to strengthen the bank while prompting huge job cuts. German newspaper editorials have also blasted the finance ministry’s role in orchestrating a deal between two weakened lenders.

Not everyone is against the deal. Private-equity firm Cerberus Capital, which owns significant stakes in both Deutsche Bank and Commerzbank, favours a tie-up, people familiar with the matter said. The German government supports a deal as well, other people have said.

Asset management firm BlackRock, which likewise owns stock in both lenders, indicated it may be sceptical about a deal.

“What problem are we trying to solve here?” the firm’s vice-chairman, Philipp Hildebrand,  asked at a conference last week. “That part is yet missing from this discussion.”

Qatar is interested in pushing for more bilateral deals with Germany in other industries as a condition for backing the merger, one of the people said.

Qatari entities own more than 6% of Deutsche, which declined to comment. Qatar’s government communications office did not immediately respond to a request for comment. Qatar’s former ruler, Sheikh Hamad bin Khalifa Al Thani, and former prime minister Sheikh Hamad bin Jassim Al Thani couldn’t be reached.

Any merger would have practical obstacles to overcome. Cost cuts — and where to make them — as well as balance sheet risks, are set to take a central role in the merger discussions, people with knowledge of the matter have said. Commerzbank has large holdings of Italian bonds, which may need to be revalued. Deutsche Bank’s US political exposure and the future of its trading unit will be tough issues, too, one of the people said.

Deutsche Bank is in talks with the European Central Bank about the potential tie-up, other people briefed on the matter said. The question of whether Commerzbank’s low valuation could be used to generate regulatory capital is a particularly important topic, they said. Regulators remain sceptical about the deal and want to see a viable and profitable business model before they approve of it, they also said.

A representative for the European Central Bank declined to comment.

When the price paid for an acquired company is lower than its tangible book value — the balance sheet equity, minus intangible assets — the acquiring firm can add some or even all of the differential to its own capital, potentially improving its regulatory capital ratios. At Commerzbank’s current market capitalisation, that is a difference of €16.5bn.

Deutsche Bank has already raised $34bn in the past nine years from investors to fund multiple restructurings and may need a further €8bn for a merger with Commerzbank, according to Christian Koch, a DZ Bank analyst.

To be sure, a deal between Germany’s two biggest listed lenders was always likely to be unpopular with some investors and stakeholders. Some have questioned whether merging two banks that are struggling to restore revenue growth after deep cuts will result in a stronger entity.

The Qatari stakes are held by investment vehicles controlled by members of the royal family and other prominent politicians. Last year, Qatar said it expected to invest €10bn in the German economy over the next five years.