A merger between German banks Deutsche Bank AG and Commerzbank AG is difficult to imagine in the short term despite recent government statements that reignited speculation about a potential deal, according to analysts.

The German government and the ECB have both been making noises regarding such a tie-up, but experts suggest that would not solve the banks' underlying problems and drag out already-lengthy restructuring programs.

Authorities want consolidation

Large banks have had a bad reputation in Germany since the global financial crisis, with most of the public placing its trust in smaller firms. But now, according to Finance Minister Olaf Scholz, banks have become too weak to support the slew of small businesses driving its export-focused economy.

The country needs bigger, stronger national banks again, Scholz told a gathering of the country's banking elite in Frankfurt at the end of August. His call has been backed by Chancellor Angela Merkel.

Some in the banking industry think the government would back a merger between Deutsche Bank and Commerzbank as a way to create a national lender to compete effectively with the best in the sector. Combined, the entity would be Europe's third-largest bank by total assets and could cater to all types of retail and corporate clients.

A shift in the government's position toward financial services is the main reason for the merger chatter, according to Hans-Peter Burghof, a professor and head of the economics and financial services department of Hohenheim University in Stuttgart.

Furthermore, the ECB would also like to see larger banks in Germany, Burghof said in an interview. The ECB has been pushing for more consolidation in the European banking sector for the past two years and has flagged Germany's highly fragmented market in particular.

ECB supervisors discussed a potential merger between Deutsche and Commerzbank in the last week of September, Bloomberg News reported Oct. 2, citing Italian newspaper Il Messaggero. The ECB reportedly believed a deal should be done by Deutsche raising between €10 billion and €15 billion in capital.

Not a priority

But there is no indication that a merger is a top priority for the two German lenders, Rabobank credit analysts said in an Oct. 3 research note.

"As such, it would be a bit strange that the tie-up was discussed at the ECB in such detail," they added.

A merger would reduce competition in the German market and increase banks' ability to make profits, but it would not solve Deutsche's and Commerzbank's underlying issues, and could heighten the too-big-to-fail problem, according to Burghof.

"What increases [in case of a merger] is the probability that you must be saved by the state if things go wrong," he said.

Deutsche and Commerzbank are both still working on multiyear restructuring plans. Neither has ruled out the possibility of merging with another institution in the long run, but both have said their primary focus is the completion of their strategic revamps.

Deutsche CEO Christian Sewing has said that over the next 18 months the firm will be focused on "doing its homework" and nothing else. CFO James von Moltke said at a bank conference Sept. 26 that speculative media reports were "fictions."

Little to gain

A key question that arises is around what benefits a tie-up would bring for Deutsche and Commerzbank, analysts said.

"[I]n general there is very little that large banks can achieve by merging with other large banks," Sam Theodore, head of financials at Scope Ratings, said in an interview.

Banking products are now much more simplified, commoditized, and easily replicated through technology, and the communication channels with clients are mostly online, he said. That limits the benefits of merging two large branch networks and two large back offices with different cultures.

In the specific case of Deutsche and Commerzbank, which have diverging business models, a merger would mean greater complexity and years of further restructuring, Theodore said.

In the initial two or three years years, the additional restructuring costs from a merger would exceed possible synergies, Aaron Alber, a financial analyst at RBI, said in an emailed comment.

And overall, synergies must not be overestimated since the business models of the two lenders are different, he said.

It may also be hard for the two banks to convince their shareholders to approve a merger. Deutsche in particular has been under considerable pressure to deliver on its long-term restructuring with costs still running high and profitability waning.

"A merger would be a distraction for management at a critical time for these banks as they work through legacy issues and restructurings," Lisa Kwasnowski, senior vice president in the global financial institutions' group of rating agency DBRS, said in an email.

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