Deutsche Bank Deal Talks With Commerzbank Break Down -- Update

By Ben Dummett and Jenny Strasburg

Banking giant Deutsche Bank AG and its crosstown rival Commerzbank AG Thursday ended merger talks, leaving in tatters the German government's hope to shore up both banks and create a banking powerhouse.

The failure to unite the two ailing lenders is likely to unleash fresh attempts by other banks to scoop up one or both of the banks, a process that could spur the biggest reshuffling of European banking assets since the financial crisis.

"After careful analysis it became apparent that such a combination would not be in the interests of either bank's shareholders or other stakeholders," Commerzbank said.

After years of flirting with a tie-up, the banks for the first time announced last month they were in formal merger talks. They were both under pressure from investors and the German government to find a way to revive themselves after years of slumping performance and overhauls.

A deal offered the potential to drastically slash costs by cutting tens of thousands of jobs and lower funding costs for troubled Deutsche Bank through access to the direct government shareholding and added retail deposit base of Commerzbank.

In the end, Deutsche Bank and Commerzbank couldn't come to terms on how to overcome both the challenges of integrating the banks' technology, back-offices and other operations -- a process that would take years to complete -- and the dilution shareholders faced from any deal.

Without a deal, both banks face myriad challenges, though Commerzbank is seen by many investors as the steadier of the two. Since 2016, it has cut staff and narrowed its focus to deposit-taking and commercial lending. That's helped Commerzbank boost its customer base as well as loan volume for German midsize companies.

Those steps have also helped make it a potential target of non-German rivals. UniCredit SpA, which has a sizable German banking unit of its own, has indicated it would look at bidding for Commerzbank should the Deutsche Bank talks fail, according to a person close to the Italian bank. Investors and analysts figure that other likely bidders could include the eurozone's other largest banks, such a BNP Paribas, Banco Santander SA and ING Groep.

Deutsche Bank, on the other hand, could face a fraught future alone. It is far more dependent on trading and investment banking businesses, has lost market share to its U.S. rivals in core areas and suffered from higher funding costs than many of its competitors. In a sign of investor skepticism, its stock price trades at just a third of its stated book value.

Some investors and analysts have said Deutsche Bank needs to pare back or pull out of investment-banking businesses that lose money, with or without a merger.

Deutsche Bank has explored options to reshape various pieces of the bank, including creating a so-called bad bank to house impaired and unwanted assets and businesses that could be earmarked for closure.

Officials with its asset-management arm, DWS, have discussed a potential deal to combine with Swiss rival UBS AG's asset management business, among other options, according to people familiar with the matter. Such a deal would likely see Deutsche Bank remain DWS's biggest shareholder with a goal of growing the merged entity, with UBS owning a stake. DWS already is publicly traded, providing shares for currency in such a deal.

The talks aren't exclusive or guaranteed to result in a deal, and timing of any potential agreement is uncertain, according to a person close to the matter.

Both banks will remain challenged by the eurozone's negative interest rates, which suppress net-interest margins, or the difference between what banks pay to depositors and what they receive from borrowers. They also face a hyper competitive market in Germany, which is home to almost 1,600 banks and none with any major market share advantages.

Collapse of the talks represents a blow to the German government, both as a 15% shareholder of Commerzbank and in its efforts to create a stronger, combined bank to help fund growth of the country's industrial base both at home and abroad amid worries of an economic slowdown.

Officials in Germany's finance ministry have maintained that it was the banks' decision on whether it makes sense to do a deal. Still, the potential of creating a European champion to compete with stronger foreign institutions in banking and other industries fueled the finance ministry's support of a deal, The Wall Street Journal has reported.

Deutsche and Commerzbank had been reluctant to enter into merger talks but took the plunge after receiving crucial support from the German government that it wouldn't stand in the way of preventing the tens of thousands of domestic jobs cuts that would have resulted from any deal.

Patricia Kowsmann contributed to this article.

Write to Ben Dummett at ben.dummett@wsj.com and Jenny Strasburg at jenny.strasburg@wsj.com

(END) Dow Jones Newswires

April 25, 2019 05:10 ET (09:10 GMT)

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