November 19, 2015 / 3:33 PM / 3 years ago

German cooperative banks DZ, WGZ finally agree to merge

FRANKFURT (Reuters) - German cooperative lenders DZ Bank and WGZ Bank have agreed in principle to merge after several failed attempts to join forces, creating the country’s fourth-largest lender with around 500 billion euros ($534 billion) in assets.

Six years after scrapping the last attempt, DZ Bank and WGZ Bank will pool investment to take on challenges such as tougher banking rules, increased competition and demand for more digital services.

The deal — Germany’s largest banking merger since Deutsche Bank’s (DBKGn.DE) takeover of Postbank in 2010 - will create a unified bank for the country’s more than 1,000 cooperative lenders, whose customers are also their owners.

Banking experts have been calling for consolidation in Germany’s fragmented banking system for a long time.

“For the efficiency of the German banking system it is a good thing”, said Dirk Becker from brokerage Kepler Cheuvreux.

He added that the deal was unlikely to prompt any mergers among Germany’s regional public-sector lenders known as landesbanks, which have shown little appetite for combining.

Germany’s banking system consists of three pillars.

While privately-owned lenders like Deutsche Bank or Commerzbank (CBKG.DE) account for 25 percent of the loans to German companies, municipally-held savings banks and landesbanks account for 42 percent and cooperative banks for 19 percent, which they aim to increase to 25 percent.

The lenders expect annual cost savings of at least 100 million euros and plan to cut jobs “moderately” from their combined 32,000-strong workforce, spreading the burden evenly between them.

DZ Bank and WGZ Bank’s function is to supply services such as transaction banking or liquidity management to cooperative banks as well as products such as Union Investment-branded investment funds, Schwaebisch Hall-branded home loans or R+V-branded insurance policies. They also back corporate loans if single items exceed a local cooperative bank’s means.

The banks said they had agreed on a memorandum of understanding and expected to sign a merger contract in March or April next year, with the combined bank to start in August. It will be the fourth-largest bank by assets after Deutsche Bank, Commerzbank and KfW [KFW.UL].

So far, no estimates have been made yet on the one-off costs of the merger, they said.

The combined bank will benefit from rules regarding minority shareholdings which will help grow regulatory capital over time by more than 500 million euros, boosting core equity capital ratios by at least 0.5 percentage points.

DZ Bank Chief Executive Wolfgang Kirsch and chairman Helmut Gottschalk will lead the combined group, while WGZ CEO Hans-Bernd Wolberg and WGZ chairman Werner Boehnke are poised to become deputies.

Kirsch said that according to past estimates, WGZ will make up about 25 percent of the combined bank, with DZ accounting for the rest, adding that the exact valuations will be determined by auditor KPMG.

Germany’s cooperative banks initially had 52 central institutes. Later, each of Germany’s states had their own cooperative central banks, which continued merging until only DZ Bank and WGZ were left in 2001.

Boston Consulting Group advised the groups on their merger.

($1 = 0.9362 euros)

Reporting by Arno Schuetze; Editing by Susan Thomas and Keith Weir

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