Deutsche-Commerzbank merger talks collapse

Germany's two biggest lenders Deutsche Bank and Commerzbank said Thursday they had called off talks on a possible merger, dashing Berlin's hopes of creating a financial "national champion".

"After thorough analysis, we have concluded that this transaction would not have created sufficient benefits" to justify the risks and costs of the complex deal, Deutsche Bank chief executive Christian Sewing and Commerzbank chief Martin Zielke said in a statement.

"After careful analysis, it became apparent that such a combination would not be in the interests of either bank's shareholders or other stakeholders." Both investors and employee unions had strong reservations about a tie-up between the Frankfurt giants.

"The disadvantages of such a merger, especially in relation to jobs, would have been disproportionate," said Frank Bsirske, head of service workers' union Verdi. But the retreat from the mooted merger is a setback for Chancellor Angela Merkel's government.

Finance Minister Olaf Scholz especially had hoped to persuade reluctant executives in Frankfurt into creating a national banking giant.

Berlin, which still holds a 15-percent stake in Commerzbank after a state rescue in 2009, was encouraging the start of talks long before the banks' official announcement in mid-March that they would sound one another out.

"Globally active German industry needs competitive banks that can accompany them across the world," Scholz reiterated in a statement on Thursday.

But he acknowledged that mergers or other forms of cooperation "only make sense if the business case adds up and if they're headed towards a dependable business model." While Deutsche Bank shares initially surged to the top of the gainers list on the DAX 30 blue-chip index, the stock was up just 0.1 percent to trade at 7.60 euros ($8.46) in Frankfurt by 12:30 pm (1030 GMT).

Commerzbank meanwhile shed 2.6 percent, also trading at 7.60 euros.

Financial sector voices had warned that the lenders were weakened after years of limping recovery from the financial crisis and its fallout, and tackling far-reaching restructuring projects of their own.

One symbolic reminder of their weakness came late last year, when Commerzbank was nudged out of the DAX's list of 30 major German companies by payments processing firm Wirecard.

Deutsche remains exposed to possible legal risks, including a Russian money laundering scandal, and both lenders are battling an environment of low interest rates and intense competition at home in Germany.

"Creating a 'national banking champion' conceals risks from a macroeconomic perspective," commented economist Franziska Bremus of Berlin-based think-tank DIW. Rather than creating a still-weak giant tied closely to the state, "banking mergers across borders can stabilise the banking landscape by spreading profits and losses more widely and reducing mutual dependence between banks and their home states," she argued. Both Italy's Unicredit and Netherlands-based ING, already well-established in Germany, have been painted by the German press as potential predators, waiting to snap up Commerzbank if the merger talks fail.

Deutsche's preliminary first-quarter results, released alongside its statement on the merger Wednesday, made clear how much ground the group has left to make up. It expects net profit of around 200 million euros between January and March, compared with 120 million over the same period last year.

In 2007 -- at the height of its bid to compete with US-based global banking titans -- it booked more than 2.1 billion euros in profit in the first quarter. Operating, or underlying profits should amount to around 290 million euros, on revenues of 6.4 billion.

CEO Sewing hailed "continued progress in executing our plans in a very challenging market environment" and said the bank was "on track" with a cost-cutting drive launched when he took the helm a year ago.