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Deutsche, Dresdner Banks in Talks to Form Alliance

Analysts say the deal could lead to a merger between the financial institutions.

Updated from 7:53 a.m. EST

Deutsche Bank AG

(DTBKY)

and

Dresdner Bank AG

(DRSDY)

are in advanced talks to form a cooperative deal that could lead to an eventual merger.

Ending months of speculation about a potential deal between the two banks, the companies have confirmed that they are nearly finished hammering out the terms for an extensive cooperation.

Last summer, both companies had said they were discussing a possible merger of their retail banking operations. Talks had reportedly broken down later in the year because Dresdner chairman Bernard Walter thought Deutsche Bank was the dominant partner in the deal.

An eventual merger would build on Deutsche Bank's position as the world's largest bank, after it acquired U.S.-based

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Bankers Trust

in 1999. If the companies eventually merge, the combined Deutsche Bank and Dresdner would have assets around $1.2 trillion.

Although the two banks have had merger talks before which came to nothing, some analysts say things could be different this time. "The conditions have changed from even six months ago," said Derek Chambers, an analyst at

HSBC

in London. A Deutsche-Dresdner linkup "has a lot of logic to it. These days it's scale you've got to go for."

Current market speculation has the two institutions possibly planning to spin off their retail banking units to financial services company

Allianz

in order to concentrate on investment banking and Internet business-to-business operations.

Chambers sees such a move as making a merger more likely since German retail banking is largely considered overpopulated and not very profitable.

"Dresdner may also have decided it's not worth trying to catch up with Deutsche in investment banking," Chambers said, a lthough he remains more skeptical whether Deutsche and Dresdner could effect considerable cost savings on the investment banking side.

The companies are expected to hold concurrent board meetings Wednesday at their corporate headquarters in Frankfurt to discuss a deal, which could be announced this week.