Deutsche Bank AG and German rival Commerzbank AG on Sunday confirmed they’re discussing a potential merger, with Deutsche Bank referring to the talks as part of a process to review “strategic options.”
The announcements signaled that discussions between the two banks that already had started informally are entering a new phase. The banks for years, under different CEOs, have considered a tie-up. But previous talks ended before any formal announcements were made.
The Wall Street Journal and other media reported earlier this month that the two lenders’ chief executives were speaking about a potential deal. The German finance ministry stands ready to support a deal, the Journal reported in January.
German securities laws require companies to disclose publicly information material to investors about potential deals when talks reach a certain threshold, such as formal endorsements by senior bank officials. Deutsche Bank’s management board was expected to talk in a meeting scheduled for this morning about various options for the bank, including a potential merger with Commerzbank, people close to Deutsche Bank said.
“There is no certainty that any transaction will occur,” Deutsche Bank said in its statement Sunday, which came out early afternoon European time. It said the lender is focused on improving its “growth profile and profitability.” The statement gave no further details aside from confirming Deutsche Bank is “in discussions with Commerzbank.”
Investors have been skeptical that the payoffs of a merger would offset the pain, including years of integration work and dilution of shareholders. What’s more, European banking regulators in private discussions about merger speculation have cautioned that any merged bank would have to adhere to strict stability guidelines.
Two weakened banks, as regulators and investors view Deutsche Bank and Commerzbank, face hurdles to combining technology and managing the costs and headaches of eliminating tens of thousands of jobs.
The nonstop speculation about the two banks’ plans created such pressure that Deutsche Bank’s chief executive, Christian Sewing, and other executives have been constantly drilled by clients and investors wondering whether the bank planned to seek a deal. Employees, whose bonuses have suffered along with Deutsche Bank’s share price, also have sought to determine what direction the bank is heading. Mr. Sewing privately has insisted that he is focused on Deutsche Bank’s stand-alone strategy, not a merger.
In a note to employees posted on Deutsche Bank’s website, Mr. Sewing said executives have a responsibility to consider options like possible mergers. He asked employees to stay focused on clients, adding that no deal is certain.
“Experience has shown that there may be a lot of potential economic and technical factors that could hinder or prevent such a step,” Mr. Sewing said in his note.
Until recently, Commerzbank had engaged bankers but they told peers no deal was actively being negotiated. The tone of that message changed in the past week, suggesting talks were on and details being hammered out, according to people close to the Frankfurt-based banks.
The German finance ministry has signaled to the banks that it supports a deal and stands ready to support tens of thousands of job cuts the banks say are necessary for a deal to make economic sense, according to an official close to Finance Minister Olaf Scholz.
Commerzbank is 15% owned by the German government after it received a bailout during the 2008 financial crisis. Since 2016, it has cut staff and narrowed its focus to deposit-taking and commercial lending. It has boosted its customer base and loan volumes to the prized German midsize companies.
But the bank continues to struggle in a highly competitive German market, home to almost 1,600 banks. The competition, including against state-backed lenders, has put pressure on its margins.
Deutsche Bank, which is far more dependent on trading and investment-banking businesses, has lost market share in core areas, ceding business to stronger U.S. banks. Deutsche Bank has struggled with higher funding costs than many rivals, making profits harder to come by for each euro in revenue the bank earns.
Deutsche Bank executives privately have suggested a combined Commerz-Deutsche Bank would benefit from lower funding costs, using a bigger pool of retail deposits to its advantage.