By James Langton

(April 2 – 12:05 ET) – Allianz AG, one of Europe’s largest insurers, has confirmed that it will make $20.5 billion takeover offer for Dresdner Bank AG, Germany’s third-largest bank.

The deal is expected to create a European financial services powerhouse with 1,200 branches and almost US$1 trillion in assets under management, according to the Financial Times. “Allianz and Dresdner Bank are bundling their forces and creating something new that is stronger than the sum of the existing parts,” said Bernd Fahrholz, Dresdner’s CEO. Fahrholz will become deputy chairman of the merged entity.

The deal will spark an unwinding of large cross-holdings in Europe, rejigging the first quarter M&A rankings and heightening merger speculation elsewhere.

As part of the deal, Allianz and Munich Re, the world’s largest reinsurer, will start reducing their 25% cross-shareholdings. Allianz will acquire Munich Re’s 40% stake in Allianz’s life insurance unit and in turn it will turn its 13.5% share of HypoVereinsbank to Munich Re. Munich Re is planning to increase its stake in Ergo, Germany’s second-largest insurer, to 95% from 63% with HypoVereinsbank holding the remaining 5%.

Dresdner’s investment banking arm, Dresdner Kleinwort Wasserstein, will be made into a separate legal unit with the intent to take it public in two to three years. The fate of Dresdner Kleinwort was one of the factors that scotched an earlier merger between Dresdner and Deutsche Bank AG.

Merrill Lynch says that the deal is sparking renewed merger speculation in banks worldwide, overwhelming other such as earnings weakness. European banks are up 8%, U.K. banks gained nearly 10%, U.S. banks are up 6%, while Canadian banks have only advanced 2%.

Merrill notes that multiples for Canadian banks also lag behind those of their counterparts in the U.K., U.S. and Australia. Merrill says earnings remain a question for Canadian banks, noting that they reported 18% growth in their first quarter ended January 31, with 11% growth expected for the second quarter.

However, U.S. banks “face an unusually harsh outlook for 1Q EPS comparisons aggravated by the sharp downturn in equity market valuations recently”. Merrill expects first quarter earnings down 12% in Money Center Banks; down 25% in Broker Dealers; and down 3% for pure play Asset Managers.

“The juxtaposition raises sustainability doubts for Canadian banks. Earnings sustainability turns on potential for corporate loan & capital market revenue deterioration, only partially tempered by potential merger considerations.”

But it isn’t expecting Canadian bank mergers this year, noting, “In Canada, we remain cautious regarding merger approval potential given pending economy-wide job disruptions and marginal public interest.”