Deutsche Bank and Commerzbank, Germany’s two largest lenders, said on Sunday that they had begun merger discussions, in what analysts see as a last-ditch effort to create a national champion that can compete with the giant American investment banks.
In a statement, Deutsche Bank said that its board would explore “strategic options” meant to shore up its growth and profitability, and Commerzbank confirmed the merger talks. Both lenders cautioned that the talks may not lead to a deal.
The idea of merging the two firms has gained support in recent months within each bank, and with the German government, after previous rounds of talks over the years failed.
The combined bank would have $2 trillion in assets and be the third-largest lender in Europe, behind HSBC Holdings in Britain and BNP Paribas of France. Together, Deutsche Bank and Commerzbank would have about one-fifth of the private customers in Germany, in theory giving them enough critical mass to be profitable in the country’s overcrowded retail banking market.
For Berlin, combining the two would create a new national champion lender that could support the country’s huge export industry and compete for international business with the giant Wall Street banks. For the lenders, it offers the opportunity to gain financial scale, cut costs and combine technology.
But analysts have questioned whether fusing two beleaguered banks would simply create an even bigger problem. Commerzbank and Deutsche Bank are among the least profitable banks of their size, primarily because they are too large and unwieldy in relation to the revenue they generate.
Deutsche Bank reported a net loss of 409 million euros, or about $464 million, for the fourth quarter of 2018. Commerzbank did better, reporting a profit of €113 million on revenue of €2.1 billion. Investors, however, remain skeptical. Shares of both banks have been trading near 10-year lows amid reports that the banks might be considering a merger.
In a message to employees on Sunday, Christian Sewing, Deutsche’s chief executive said, “I have consistently stressed that consolidation in the German and European banking sector is an important topic for us.” He added, “Our stated aim remains to be a global bank with a strong capital markets business — based on a leading position in our home market in Germany and in Europe, and with a global network.”
Rumors have been circulating for months that German political leaders were trying to orchestrate a merger to create a homegrown alternative to overseas giants, including established American ones, like JPMorgan Chase, and fast-growing Chinese ones. If there is another financial crisis, officials in Berlin do not want German businesses to be dependent on foreign banks for credit and access to capital markets.
Olaf Scholz, Germany’s finance minister and a member of the center-left Social Democrats, has repeatedly stressed his belief that the country needs a large financial institution to compete at a global level. His deputy, Jörg Kukies, a former head of Goldman-Sachs in Germany, has met several dozen times with representatives of Deutsche Bank. The ministry acknowledged the news on Sunday, saying, “We are in regular contact with all involved parties.”
The deal still faces many hurdles. Unions that represent Deutsche Bank and Commerzbank have expressed opposition to a merger, which would certainly lead to thousands of job cuts. And agreeing on the terms of a merger may be difficult as executives of the two longtime rivals seek to defend their turf.
The Verdi service workers’ union, one of Germany’s largest unions, made clear its displeasure with a potential merger. “We reject a possible fusion of both banks with a view to the danger posed to tens of thousands of jobs,” Jan Duscheck, who heads the division for bank workers, said in a statement. He cited, among others, the retail and investment banking divisions as points where current difficulties at both banks would only be worsened by a merger.
“A fusion would lead to additional problems,” Mr. Duscheck said, “but without solving existing problems.”
Both banks are based in Frankfurt, and their headquarters are within easy walking distance of each other.
A merger would leave Germany with just one bank with a significant international footprint, and might be the final chapter in the long decline of the once mighty German banking system.
Of the five biggest German banks at the end of the 1990s, Commerzbank and Deutsche Bank are the only two that still exist as independent entities. Both banks were founded in 1870, as Germany was emerging as an industrial power.
Previous banking mergers in Germany have not turned out well.
Commerzbank required a government bailout in 2009 after it acquired Dresdner Bank, which turned out to have billions of euros in toxic assets. The German government still owns about 15 percent of Commerzbank.
Deutsche Bank is still struggling to absorb Postbank, which it acquired in 2010.
But Deutsche Bank’s biggest problem is that it lacks a clear identity or competitive advantage in the global banking market, analysts say. And it is still dealing with the legal consequences of its attempt to become a major player on Wall Street.
Deutsche Bank became caught in many of the big scandals of the early 2000s: rigging interest rates, selling toxic mortgages, laundering money and violating sanctions. It paid billions of dollars in fines.
Deutsche Bank’s reputation continues to suffer. In November, German prosecutors and police officers raided Deutsche Bank’s headquarters in Frankfurt as part of an investigation into whether some bank employees helped criminals launder money in offshore tax havens. The bank has said that its own inquiry uncovered no wrongdoing by employees.
In the United States, Deutsche Bank has become caught up in investigations of President Trump. The bank was one of the few lenders willing to do business with Mr. Trump in recent years.
Last week, the New York attorney general’s office issued subpoenas to Deutsche Bank and Investors Bank for records relating to the financing of four major Trump Organization projects and a failed effort to buy the Buffalo Bills of the National Football League in 2014, according to a person briefed on the subpoenas.
Deutsche Bank is already the subject of two congressional investigations.
The main rationale for the merger is that it would give the combined entity a big enough share of the German banking market to be profitable.
The merger of Commerzbank and Deutsche Bank may be the final megadeal on the résumé of Paul Achleitner, a former Goldman Sachs executive who is now chairman of Deutsche Bank’s supervisory board. Mr. Achleitner has been a behind-the-scenes force in the restructuring of German banking for decades.