Bloomberg News

FRANKFURT - Germany's biggest banking companies, which tried and failed to merge last year when the markets were at their peak, now are taking a second look at combinations as earnings slide.

DG Bank AG and GZ-Bank AG, the two largest cooperatives, announced on Sunday that they had agreed to merge. Commerzbank AG, the country's fourth-largest banking company, said on Monday that it is exploring a mortgage banking link with Dresdner Bank AG.

Dresdner, which is being bought by Allianz AG for $20 billion, said in April that it was seeking back-office partners.

German banking companies are trying to cut costs as the possibility of a recovery this year becomes unlikely, analysts said. Dresdner's pretax first-quarter profits dropped 63% from a year earlier, while Commerzbank's fell 48%, and Deutsche Bank AG's declined 12%.

"They are looking for smaller, practical solutions," said Michael Fraikin, who helps manage about $1.7 billion of German stocks at Invesco Asset Management. "The trend toward further consolidation is definitely there."

Banking companies are under pressure to act as the stock markets drop and a spate of economic reports suggest the German economy is close to recession. The benchmark DAX index has fallen 8% this year, while the Neuer Markt index has lost 40%.

Germany, with more than 55,000 branches and 2,912 banks, is one of Europe's most overbanked countries, according to figures from the Bundesbank. That fact keeps costs high and profitability low.

Dresdner, which tried but failed to combine last year first with Deutsche Bank and then with Commerzbank, made the biggest step so far in April, when it agreed to be bought by Allianz AG.

At that time HypoVereinsbank AG, the No. 2 banking company and itself the result of a 1998 merger, also agreed to strengthen its links with Munich Re, the country's biggest reinsurer, in a bid to sell more combined banking and insurance products.

German banking companies have also started to rein in costs. Commerzbank this month instituted a hiring freeze to save money. HypoVereinsbank plans to slash 1,500 jobs in the coming years. Deutsche Bank, which is still looking for a distribution partner, is considering combining some analyst jobs.

But the companies need to cut more costs as income from advising on mergers and acquisitions slumps and bad-loan charges rise, analysts said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.