Deutsche Bank watchdogs said to favor Europe deal for lender

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Deutsche Bank's key regulators would prefer the lender merge with a European rival rather than local competitor Commerzbank, setting them apart from forces in the government keen on an all-German deal.

The European Central Bank favors a cross-border combination to drive integration in the region's financial markets, according to people familiar with the matter. Analysis by German regulator BaFin suggests a preference for a European deal because the two domestic banks are currently too weak to benefit sufficiently from a merger, said the people, who asked not to be identified because the deliberations are private.

The watchdogs' view is more aligned with the position of Deutsche Bank Chief Executive Officer Christian Sewing, who has asked for patience with his turnaround plan before embarking on any deal. The European preference, meanwhile, is at odds with some German government officials who want a national banking champion. Both banks are key partners of the companies that make up Germany's export-oriented economy.

The ECB, BaFin and the German Finance Ministry declined to comment, as did Deutsche Bank and Commerzbank.

Deutsche Bank shares, which have slumped 47 percent over the past 12 months, jumped 8.3 percent in Frankfurt trading. Commerzbank climbed 7.8 percent.

Late last year, the Finance Ministry asked BaFin for its data on how different merger scenarios could play out for the German banks, said people familiar with the matter.

During a strategy retreat in September, Deutsche Bank executives concluded that a merger with Swiss competitor UBS Group AG was the most favorable option among potential European partners, though they determined that the time isn't right due to the German lender's weak share price, people familiar with the matter have said. BaFin's analysis came to a similar conclusion, the people said.

Merger challenges

Even with any high-level discussions, seeing a combination through won't be easy, according to Philipp Haessler, an analyst at Pareto Securities in Frankfurt who has a hold recommendation on both Deutsche Bank and Commerzbank.

"Practice shows that successful mergers are hard to pull off," said Haessler. "I don't see why another bank would want to saddle themselves with Deutsche Bank's investment bank. Frankly, Commerzbank may be the more attractive partner for a competitor that wants to expand in Germany."

Beyond cost savings, the logic for a German banking combination is that Commerzbank's corporate banking revenues could help substitute Deutsche Bank's slumping trading earnings.

BaFin has long held it would prefer to see both banks improve profitability if they are to pursue a combination, said the people. Still, some at the banking watchdog are concerned that mergers could end up working against efforts to ensure banks are no longer too big to fail, they said.

Bloomberg News