Commerzbank and Dresdner deepen merger talks

Commerzbank and Dresdner Bank have deepened talks about a potential merger that could create a bigger domestic rival to Deutsche Bank in Germany's fragmented banking sector.

Commerzbank and Allianz, the insurance group that owns Dresdner, have been in contact for weeks over a possible link-up but discussions have intensified and become more detailed, according to people aware of the relations between the two.

Teams are being allowed closer scrutiny of financial information from the respective banks.

The greater contact comes after the two discussed a joint bid for Deutsche Postbank, Germany's former post office savings bank that Deutsche Post, the majority owner, may sell.

A Commerzbank-Dresdner deal would not be based solely on a subsequent bid for Postbank, which is considered to be difficult and would heighten risks involved in integrating the institutions.

A deal is not thought imminent and Allianz is talking to other potential partners for Dresdner.

One obstacle could be Dresdner Kleinwort, Dresdner's investment banking arm, which made heavy writedowns because of its subprime exposure. Commerzbank has retreated from investment banking in the past decade.

Allianz is preparing a legal split of Dresdner Kleinwort from the rest of the bank before the end of August to increase its flexibility in negotiations. But analysts and bankers believe the insurer would prefer a deal that included all of Dresdner.

Investment bankers say the two sides may struggle to agree a valuation for a combined entity that would keep Allianz's stake below 30 per cent – the most a minority shareholder may hold.

Profitability in German banking is among the lowest in Europe and Commerzbank and Dresdner – based in Frankfurt – would expect a combined entity to cut costs and increase returns.

German private sector banks have a history of abandoning previous consolidation efforts. "We were discussing this eight years ago and history tells us this can go slowly [sometimes]," said a person with knowledge of the talks.

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Dresdner and Commerzbank rank with Deutsche as the biggest private sector institutions by assets in Germany's "three-pillar" banking sector, where most retail deposits are held by co-operative or state-run savings banks.

Dresdner has a balance sheet of €500bn ($790bn); Commerzbank's is more than €600bn and Deutsche's more than €2,000bn.

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