FRANKFURT, Germany – Shares in Deutsche Bank AG and Commerzbank AG rose on Monday after the German banks said that they had entered formal merger talks following months of speculation of a potential tie-up.
On Sunday, Deutsche Bank said the talks are part of a review of strategic options for the bank, which has faced challenges that eroded the market value of what was once Europe’s most globally ambitious financial institution.
At 0920 GMT, Deutsche Bank traded 3.2 percent higher at 8.07 euros ($9.14) and Commerzbank was up 5.8 percent at 7.56 euros.
Confirmation of the merger discussions should give European indexes an opening push, says Peel Hunt, but analysts, in general, are skeptical of a Deutsche-Commerzbank combination.
“Share prices of both banks rise in early trading over optimism that some form of the deal might get done,” said CMC Markets UK, but “this remains a big ask, with many obstacles.”
These include value assessments of both complex and more traditional products on the banks’ balance sheets, as well as nonperforming loans, said Michael Hewson, chief market analyst at CMC Markets UK.
“While investors may well be buying into the early narrative of some form of deal, the old saying that you can’t make a silk purse out of a sow’s ear has never been more true,” Hewson said.
A deal would bring cost savings for both banks, which have spent billions of dollars on restructuring and taken measures to reduce staff.
But they have been pressured by a long period of low-interest rates, among other challenges.
“The question that comes to mind is whether combining two struggling banks would just create one larger ‘too big to fail’ struggling bank?” says Jasper Lawler, head of research at London Capital Group.
German government officials have been concerned about the decline of the two banks, which contrasts with growing power among banks in other countries.
The potential creation of a “European champion” to compete with foreign institutions in banking and other industries has encouraged finance ministry support for a merger, people involved in government discussions have told The Wall Street Journal.