German ambitions evaporate as Deutsche Bank merger talks with Commerzbank collapse

German hopes of creating a national banking champion able to challenge global competitors were dashed on Thursday when Deutsche Bank and Commerzbank ended merger talks due to the risks of doing a deal, restructuring costs and capital demands.

Germany’s two largest banks announced that nearly six weeks of high-level negotiations about a tie-up had ended in failure, confirming an earlier Reuters report and immediately raising questions about the future of the Frankfurt-based rivals.

The decision to ditch the talks followed a final early morning meeting between Deutsche Bank Chief Executive Christian Sewing and his Commerzbank counterpart Martin Zielke, two sources told Reuters.

While the talks are over, investors doubt either bank can go it alone for long under their current strategies given their low levels of profitability.

German government officials, led by Finance Minister Olaf Scholz, had pushed for a tie-up to create a national banking champion and end questions over the future of both banks, which have struggled to recover since the financial crisis.

Deutsche Bank’s 2018 return on equity was just 0.4 percent, trailing far behind rival U.S., and increasingly other European, investment banks, while Zielke said this month that Commerzbank does not have the market share for costly investments, fuelling speculation of an alternative tie-up if talks fell through.

Shares in Commerzbank were 2.1 percent lower at 1235 GMT. Deutsche Bank traded 0.3 percent lower, erasing earlier gains.

Deutsche Bank will now face pressure to make more radical changes, such as cuts to its U.S. investment bank as advocated by regulators and some major investors. It is already looking at a deal for its asset management unit DWS.

“Deutsche Bank will continue to review all alternatives,” Germany’s largest bank said.

Employees of both banks immediately welcomed the news, although a senior Commerzbank manager acknowledged it opened the door to further uncertainty as foreign competitors circle.

“It is clear that others will now come out of the woodwork with offers and ideas,” the manager told Reuters.

Doing nothing is “not an option”, Zielke has told his staff, 82 percent of whom were against a merger in an internal survey.

Both UniCredit and ING Groep have expressed interest in Commerzbank, which is Germany’s No. 2 lender and 15 percent owned by the government, sources have said.

UniCredit and ING declined to comment after news that talks between Deutsche Bank and Commerzbank had failed.

Some major Deutsche Bank investors had questioned the deal’s logic and were unwilling to stump up any extra cash to get it done, while credit ratings agencies had warned of risks.

The European Central Bank would have asked Deutsche Bank to raise fresh funds before it gave the go-ahead for a merger, a person with direct knowledge of the matter said. .