* Banks cite risks of getting deal done, restructuring costs
* Announcement came during the sixth week of talks
* Raises questions about future of both banks
* Deutsche shares up 1.1 percent, Commerzbank off 2.6 pct (Updates with Commerzbank employee survey, fund manager,Bundesbank comment, CFO)By Andreas Framke, Arno Schuetze and Tom SimsFRANKFURT, April 25 (Reuters) - German hopes of creating anational banking champion able to challenge global competitorswere dashed on Thursday whenDeutsche Bank and Commerzbankended merger talks due to the risks of doing a deal,restructuring costs and capital demands.Germany's two largest banks announced that nearly six weeksof high-level negotiations about a tie-up had ended in failure,confirming an earlier Reuters report and immediately raisingquestions about the future of the Frankfurt-based rivals.The decision to ditch the talks followed a final earlymorning meeting between Deutsche Bank Chief ExecutiveChristian Sewing and his Commerzbank counterpartMartin Zielke, two sources told Reuters.Both CEOs said a deal would not have created sufficientbenefits to offset the risks and costs of a merger, which hadbeen opposed by unions fearing 30,000 job losses, and raisedconcerns among investors and regulators. While the talks are over, investors doubt either bank can goit alone for long under their current strategies given their lowlevels of profitability.German government officials, led by Finance Minister OlafScholz, had pushed for a tie-up to create a national bankingchampion and end questions over the future of both banks, whichhave 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 Commerzbankdoes not have the market share for costly investments, fuellingspeculation 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 radicalchanges, such as cuts to its U.S. investment bank as advocatedby regulators and some major investors. It is already looking ata deal for its asset management unit DWS. "Deutsche Bank will continue to review all alternatives,"Germany's largest bank said.
BIDDERS IN THE WINGSEmployees of both banks immediately welcomed the news,although a senior Commerzbank manager acknowledged it opened thedoor to further uncertainty as foreign competitors circle."It is clear that others will now come out of the woodworkwith 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 haveexpressed interest in Commerzbank, which is Germany's No. 2lender and 15 percent owned by the government, sources havesaid.UniCredit and ING declined to comment after news that talksbetween Deutsche Bank and Commerzbank had failed.Some major Deutsche Bank investors had questioned the deal'slogic and were unwilling to stump up any extra cash to get itdone, while credit ratings agencies had warned of risks.The European Central Bank would have asked Deutsche Bank toraise fresh funds before it gave the go-ahead for a merger, aperson with direct knowledge of the matter said. .The German central bank, which helps oversee the banks,stressed their individual health, calling them sound and stable."This was the case prior to discussions, during discussionsand now - without qualification," Bundesbank executive boardmember Joachim Wuermeling said.
Deutsche Bank also published preliminary earnings in whichit said it expects to post a first-quarter net profit of about200 million euros ($223 million), beating analysts' expectationsof 29 million."A merger would have been an enormously complicated andprotracted undertaking. In the end, reason has won," said IngoSpeich, head of sustainability and corporate governance at DekaInvestment, a shareholder in both banks, adding they urgentlyneed to address their strategies.Alexandra Annecke, portfolio manager at Union Investment,which also holds shares in Deutsche Bank, said it needs to focuson increasing profitability, especially at its investment bank.
Deutsche Bank's finance chief James von Moltke told CNBCthat the U.S. investment bank is "a core part of our strategy".Gerhard Schick, finance activist at Finanzwende and a formermember of the German parliament, welcomed the end of talks butcautioned that Deutsche Bank remains "too great a risk". "The bank is still far too large and would probably have tobe rescued in an emergency," he said, with reference to thelikelihood of Deutsche Bank needing to turn to the state to keepit afloat if it ran into difficulty. (Reporting by Hans Seidenstuecker, Andreas Framke, ArnoSchuetze, Tom Sims, Francesco Canepa, Frank Siebelt; Additionalreporting by Toby Sterling in Amsterdam and Gianluca Semeraro inMilan; Editing by Sabine Wollrab, Tassilo Hummel, MichelleMartin and Alexander Smith)
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