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LEAD 1 – Deutsche Bank and Commerzbank confirmed the merger discussion

(Updated with context)

Deutsche Bank and Commerzbank confirmed on Sunday that they had begun talks on the possible merger of two German banks.

This announcement followed a meeting of the two major German banks, Reuters sources said.

"In the light of the opportunities that appear, the Deutsche Bank Board has decided to study strategic options," says the first German bank in the statement.

However, the bank takes care that there is no certainty that the talks will lead to an agreement and that the board is "focused on improving the profile of growth and profitability of the bank".

Commerzbank, Germany's second-largest bank, said the outcome of the talks was "open."

Formalization of talks between Deutsche Bank and Commerzbank increases the chances that these two institutions connect.

Such a merger was the subject of multiple speculation and was created in 2016, before two banks decided to focus on their own restructuring.

The German government, concerned about the financial health of Deutsche Bank, lobbyed in Germany's largest bank to discuss merging with Commerzbank, the country's second-largest bank.

Deutsche Bank appeared undamaged by the financial crisis of 2008, but then lost the country and failed to make a sustainable profit.

In 2016, the International Monetary Fund (IMF) described it as a higher potential financial risk due to its links with other banking groups.

The German authorities are afraid that a recession or a major punishment, for example, would jeopardize the bank's fragile recovery. Berlin wants a credible national champion in banking who will support his export-based economy.

They also want the financing of German small and medium-sized enterprises, which is Commerzbank's specialty – from which the state holds 15% of the capital – remains in German hands. These small and medium enterprises are the lungs of the German economy.

"We will seriously study the merger," the source said close to the file. "But there is no guarantee that an agreement will be reached in the end."

To date, two banks have never commented on alleged merger talks.

However, last Monday, German Finance Minister Olaf Scholz confirmed that two banks are considering the possibility of merging.

Both banks would have a bank of nearly 1,800 billion euros of assets with a market capitalization of about 25 billion euros. (Andreas Framke and Tom Sims, Matthieu Protard for the French version, edited by Pierre Serisier)

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