Germany's troubled banking giants Deutsche and Commerzbank decide against merger

The decision ends a courtship that officially began in March, when the two banks said they would discuss combining to form Europe’s third-largest lender, with assets of US$2 trillion.
The decision ends a courtship that officially began in March, when the two banks said they would discuss combining to form Europe’s third-largest lender, with assets of US$2 trillion.PHOTO: EPA

FRANKFURT (NYTIMES) - Deutsche Bank and Commerzbank, Germany's two largest banks, called off widely criticized merger talks on Thursday (April 25), saying that they had concluded the risks of combining outweighed the benefits.

Shares of Deutsche Bank rose as much as 4 per cent on Thursday as investors registered their relief that Germany's largest lender had not pursued a deal that analysts said would have only aggravated its problems. Commerzbank shares fell about 2 per cent.

But the collapse of negotiations means that Germany's banks must find another solution to a long list of urgent problems, including meagre profitability, excessive labour costs and a shift to online banking that they have been slower than competitors to embrace.

The banks appeared to have come to the same conclusion as many critics of a potential merger, who pointed to the poor track record of past German bank mergers and the likelihood that regulators would require the banks to raise more capital. Investors who have been burned by the two banks' slumping shares may well have balked at staking any more money for a merger.

Merging the two banks "would not have created sufficient benefits to offset the additional execution risks, restructuring costs and capital requirements associated with such a large-scale integration," Deutsche Bank and Commerzbank said in identical statements.

The decision ends a courtship that officially began in March, when the two banks said they would discuss combining to form Europe's third-largest lender, with assets of US$2 trillion.

The talks took place with encouragement from the German government, which was seen as trying to create a national champion that could compete with Wall Street and also be more loyal to German customers in a crisis than a foreign owned bank.

But the potential deal faced opposition from unions that represent bank workers and shareholders. It also was criticized by many financial experts and opposition politicians who said it made no sense to combine two lenders with profitability problems and depressed stock prices.

"All reasonable people are breathing a sigh of relief," Lisa Paus, who speaks for Germany's Green Party on finance issues, said in a statement. "No one could ever explain why an even bigger risky bank made sense."

Regulators, including the European Central Bank, had also scrutinized the proposed deal closely. They were expected to set conditions that would have made a merger unworkable, for example insisting that the banks raise more capital than investors would have been willing to provide.

The end of the merger talks could open the door for a foreign bank to acquire Commerzbank. Mario Draghi, president of the European Central Bank, has spoken in favor of cross-border deals, saying they help make banks less vulnerable to the economic ups and downs of one country.

But Commerzbank's sale to a foreign competitor such as ING Group of the Netherlands or UniCredit of Italy would be a blow to German pride, and it is unclear if the government, which owns 15% of Commerzbank shares, would allow such a sale.

With the collapse of negotiations, each bank must now face its formidable problems alone. Both Commerzbank and Deutsche Bank are very inefficient compared with European rivals, with costs that are too high in relation to revenue.

Both suffer from a lack of profitable business areas, and Deutsche Bank is still dealing with the damage to its reputation from multiple scandals since the 2008 financial crisis. Most recently, the bank has come under fire for its role as a conduit for dirty money that flowed through the Baltic branches of Danske Bank, a Danish lender embroiled in a money-laundering scandal.

Commerzbank has had its share of problems, including a large portfolio of toxic assets, but was not involved in as much wrongdoing as Deutsche Bank. Commerzbank has made more progress cutting costs.

Collapse of the talks is also a setback for Olaf Scholz, the German finance minister, who was seen as a pushing for a merger behind the scenes.

"Germany's globally active companies need competitive financial institutions that can support them around the world," Scholz said in a statement Thursday. He added, though, that cooperation between Commerzbank and Deutsche Bank would "only make sense if it adds up from a business point of view, and moves toward creation of a resilient business model."