Germany Steps Up Bank Consolidation Drive

After trailing behind the shakeout that has reshaped banking over the years in other parts of Europe, signs have begun to emerge that two of Germany's leading banks, Commerzbank and Dresdner Bank, are stepping up their drive to join forces.

The German business daily Handelsblatt reported Thursday, June 12, that Commerzbank, Germany's second biggest bank, and Dresdner, the banking offshoot of Munich-based insurance giant Allianz, are examining each other's books as part of the build-up to possible merger talks.

In the meantime, Germany's biggest bank, Deutsche Bank AG, has emerged as a possible buyer for giant US banking group Citigroup's German retail business, Citibank. After taking a big financial hit from the credit crisis, New York-based Citigroup is considering spinning off its German banking unit.

Possible three-way merger

With a large part of Germany's banking market in the hands of state banks that turn in a low return on equity, the country's banks have been battling for years with low profitability.

The moves by Dresdner and Commerzbank to forge a tie-up could be part of a prelude to the two Frankfurt cross-town rivals launching what would be a three-way merger with Postbank to form a new banking powerhouse in Europe's biggest economy.

This would also represent a challenge to Germany's state-owned and cooperative banks which have a strangle hold on the nation's retail banking business, controlling about two thirds of the market, and which have been a major stumbling bloc to any major industry restructuring.

However, the fallout from the credit crisis has also helped to increase the pressure on Germany's state-owned banks to consider mergers, which could help to pave the way for freeing up the banking system for restructuring.

Postbank brings coveted customer base

The postal and logistics group Deutsche Post, Postbank's parent, has indicated that it will make a final decision about selling off a big stake in its banking arm early in the second half of the year.

With a customer base in Germany of more than 14 million and a branch network of over 800, Postbank is considered a major prize in any battle over the future of the nation's banking sector.

Allianz, Dresdner and Commerzbank declined to comment on Thursday's media report that they have launched moves towards forming a new banking group.

But there are several possible new banking combinations that could emerge in the run-up to the end of the year with Deutsche Bank having also said it might to try to pick up Postbank.

Learning from past banking flops

However, despite the pressures for a restructuring of the German bank industry, the last major shakeout in the nation's financial sector was in 2005 when Italy's biggest bank Unicredit SpA purchased Munich-based HVB in what was Europe's biggest-ever cross-border banking deal.

After the embarrassing and dramatic collapse eight years ago of Deutsche Bank's ambitious 30-billion-dollars merger bid for Dresdner, Allianz stepped in about 12 months later to pick up Dresdner.

This was part of an equally ambitious plan drawn up by Allianz to sell its pension and insurance schemes through Dresdner's network of more than 800 branches.

Now, with Dresdner's earnings feeling the pinch as a result of the global credit squeeze, Allianz appears keen again to play a key role in helping to orchestrate a new wave of bank consolidation in Germany -- this time by offloading Dresdner.

"We will make an active contribution to this consolidation," said Allianz group financial officer Helmut Perlet after Dresdner unveiled a first-quarter loss and Allianz said it planned to break up its banking offshoot later this year.

Obstacles lie ahead for bank consolidators

Analysts see Allianz as possibly spinning off Dresdner to Commerzbank with the new financial house then moving in to buy a controlling stake in Postbank.

The three-way merger would mean an expanded distribution network for Allianz to sell its insurance and pension products.

But as was the case in the past, those driving bank consolidation in Germany face an uphill battle to bring about any far-reaching change in the nation's finance sector.

For one, even if Dresdner and Commerzbank did try to mount a merger with Postbank they could face stiff competition from several foreign-owned heavyweights, including Spain's Banco Santander SA and the Netherlands' ING, which has already been seeking to make inroads into Germany.

Moreover, the synergies and cost savings that executives would want to secure from a link up between Postbank, Dresdner and Commerzbank could also mean them finding themselves facing tough union action to head off any cuts in the banks' labor force.