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Deutsche Bank and Commerzbank have agreed to hold formal talks about merging to create Europe's fourth-largest lender.

Critics have highlighted up to 20,000 job losses, the pair's bad deals in the past, and existing challenges for both banks.

After months of speculation, Deutsche Bank and Commerzbank have agreed to hold formal talks about a merger. However, a tie-up of Germany's two largest lenders has raised eyebrows as it could lead to tens of thousands of job losses, the pair's previous deals haven't always impressed, and it may not address underlying problems at both banks.

A tie-up promises to create Europe's fourth-largest lender, with north of €1.8 trillion in assets and a market value of about €25 billion, according to Bloomberg.

Analysts think the combined group could slash its annual costs by more than €2.2 billion ($2.5 billion) and command one-fifth of Germany's high-street banking business. Investors cheered the news, sending Deutsche Bank shares up 4% and Commerzbank shares up 7% on Monday morning.

Read more: Deutsche Bank's malaise goes deeper than its tumbling share price

However, the deal could result in the elimination of up to 20,000 jobs — more than 13% of the two companies' combined workforces — says the chief of Germany's Verdi labour union, according to Reuters. The union says there's overlap between the firms' retail and business customer segments, arguing international deals would suit both firms better.

Both Deutsche Bank and Commerzbank have patchy deal histories. Deutsche Bank struggled to integrate Postbank, which it bought for €6.5 billion euros in 2010.

Commerzbank's troubled takeover of Dresdner Bank in 2008 meant the financial crisis hit it harder, leading to two government bailouts. Yet mergers are to be expected in a nation with close to 1,600 banks, according to The Economist.

The mega-deal also comes at a difficult time. Both banks are navigating an economic slowdown in Germany — which nearly fell into recession at the end of last year — as well as the broader eurozone. A depressed backdrop could make it harder for the firms to satisfy Germany's tough unions and comply with its strict labour laws.

Deutsche Bank's sales fell and borrowing costs rose in the final quarter of 2018, and German officials raided its headquarters. It's unclear how absorbing Commerzbank will help Deutsche Bank's ailing investment banking arm, its main earnings driver.

Financing the merger and appeasing regulators could also mean selling off assets such as DWS Group, Deutsche Bank's asset management business that has reportedly caught the eye of Allianz. Analysts think Deutsche Bank may need to raise about €8 billion to pull off the deal.

Markets Insider

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