The banks cited the need for extra capital, restructuring costs and execution risks as the reasons why the merger would not be in their best interests.
"It made sense to evaluate this option for domestic consolidation in Germany. However, we were always clear: We needed to be convinced that any potential combination would generate higher and more sustainable returns," Christian Sewing, chief executive officer of Deutsche Bank, said in a statement Thursday morning.
Reports and speculation regarding a merger had been rife for months, heightening under the tenure of German Finance Minister Olaf Scholz, who has spoken out in favor of strong banks for the European nation. But there's been criticism too since it may lead to job losses.
An industry source with knowledge of the matter, who preferred to remain anonymous, told CNBC last month that there was not widespread support for the merger within Deutsche Bank.
"The general feeling is that the merger is not a great idea since Commerzbank doesn't have the same amount of credibility on the street as Deutsche Bank when it comes to clients and this can impact future trades," the source said.
Both banks have struggled to return to profit since the global financial crisis of 2008, and the subsequent euro zone sovereign debt crisis of 2011. In the past few years, Deutsche Bank in particular has made headlines for all the wrong reasons — from settlements with the U.S. Department of Justice, to management reshuffles, weak earnings, constant restructuring and steep stock price falls.
More recently, there's been reports of the Federal Reserve investigating its role in a money-laundering scandal at Danske Bank and an inquiry from two U.S. House of Representatives committees on the lender's ties to President Donald Trump. Earlier this month, a report in U.K. newspaper The Guardian said the German bank could face legal action over a $20 billion Russian money-laundering scheme.
Deutsche Bank's management said Thursday that it "will continue to review all alternatives to improve long-term profitability and shareholder returns."
Stefan Mueller, chief executive officer of financial firm DGWA, told CNBC: "I think it is good for Commerzbank, it's bad for Deutsche Bank."
"Commerzbank has shown in the last weeks, since it was everywhere in public, that it was a well-restructured bank and better than just a junior partner for Deutsche Bank," he added.
Shares of Deutsche Bank and Commerzbank are both down more than 35% over a 12-month period and more than 80% over a 10-year period. Sewing, who took the helm in April 2018, has been making efforts to turn around the bank's ailing strategy. Various sources have told CNBC that competition from other players in the market is what pushed Sewing to fast-track the merger talks with its domestic rival.
Thursday's announcement also comes after media reports had suggested that ING and UniCredit would be interested in acquiring Commerzbank. And that the Swiss bank UBS is looking at the asset management arm of Deutsche Bank, called DWS.
"DWS and asset management is a core part of Deutsche Bank's strategy ... we would expect it would be unchanged," James von Moltke, the chief financial officer of Deutsche Bank, told CNBC's Annette Weisbach Thursday.
Von Moltke also denied reports that in the proposed deal with Commerzbank it would have needed to raise as much as 10 billion euros. "(That) speculation is way out of line," he said.
Deutsche Bank also gave some guidance to investors about its latest quarterly numbers Thursday — a day ahead of its official earnings release.
It said that net income is expected to hit about 200 million euros ($ 222.92 million) for its first quarter. This after reporting a loss of 409 million euros in the final quarter of 2018.
"Our preliminary results demonstrate the strength of our franchise and our continued progress in executing our plans in a very challenging market environment," Sewing said in a statement.
"We have made progress on key business drivers: growth in loans and deposits, a recovery in assets under management and market share improvements in corporate finance. Our continued cost discipline helped us to offset lower revenues, and we are well on track to meet our 2019 cost target of 21.8 billion euros," he added.