Deutsche Bank AG (DB - Get Report) walked away from plans to merger with Commerzbank AG (CRZBY) Thursday as Germany's biggest lender and its main domestic rival said execution risks, capital requirements and costs related to the tie-up would outweigh its benefits.
The tie-up talks, which lasted around six weeks, would have created Europe's third-largest bank with a market value of around €25 billion alongside a $2 trillion balance sheet, but were opposed by nearly every senior voice in both German and European banking, with reports that European Central Bank regulators would ask Deutsche Bank to raise fresh capital in order to mitigate any risks linked to the merger. Germany's powerful unions, as well, opposed the deal, arguing it put 30,000 jobs at risk.
"It made sense to evaluate this option for domestic consolidation in Germany. However, we were always clear: we needed to be convinced that any potential combination would generate higher and more sustainable returns for shareholders and allow us to enhance our value proposition to clients," said Deutsche Bank CEO Christian. "After thorough analysis, we have concluded that this transaction would not have created sufficient benefits to offset the additional execution risks, restructuring costs and capital requirements associated with such a large-scale integration."
"I would like to thank Christian Sewing and everyone involved for the constructive discussions over the past few weeks," said Commerzbank CEO Martin Zielke. "We will continue our strategy, grow together with our clients and invest in our future."
Deutsche Bank shares were marked 4.16% higher in Frankfurt following the earnings guidance and new of the merger collapse, and changing hands at €7.91 each. Commerzbank shares, meanwhile, slipped 2.15% to €7.63 each.
Deutsche Bank also said it expects to posted stronger-than-expected first quarter pre-tax earnings of around €290 million, on revenues of €6.4 billion, in a surprise update that attempted to cushion the blow of the merger collapse.
"Our preliminary results demonstrate the strength of our franchise and our continued progress in executing our plans in a very challenging market environment. We have made progress on key business drivers: growth in loans and deposits, a recovery in assets under management and market share improvements in corporate finance," said Deutsche Bank's Sewing. "Our continued cost discipline helped us to offset lower revenues, and we are well on track to meet our 2019 cost target of €21.8 billion."
From the Germany government's perspective, given its 15% stake it Commerzbank, it would have also created a bank that could both compete on a global stage and continue to support a stable base of lending to Germany's small and medium sized companies -- known as the Mittelstand -- which are the lifeblood of Europe's biggest economy.