The two largest German lenders, Deutsche Bank (DE :), (NYSE 🙂 and Commerzbank (DE :), (OTC :), finalized negotiations on a possible merger last week, indicating that the problems in the European banking sector go too deep for simple solutions.
After six weeks of talks, global banks said they concluded that the expected benefits of a combination would not justify "additional execution risks, restructuring costs and capital requirements associated with such large-scale integration". The two lenders are a symbol of everything that is wrong with Europe's ailing banking sector – deep-rooted structural problems, high income costs, low profitability, threat to market share of aggressive American rivals and a lack of answers to competition from fintech businesses.
"Deutsche's biggest problem remains the cost base, far beyond many of its comparable peers, along with outdated IT systems," Michael Hewson, market analyst at CMC Markets, a London-based brokerage, said by mail Friday. "The problems that Deutsche is confronted with are simply still too big to make it an attractive acquisition partner, let alone a merger partner."
Deutsche Bank Weekly TTM
Deutsche reported a fall of 9% from a year earlier to 6.35 billion s ($ 7.08 billion) on Friday. This was the ninth consecutive quarter of declining sales, which also led to Chief Sewing Officer Christian Sewing to lower the lender's revenue outlook for 2019. Last month, the bank predicted a slight increase in sales, but on Friday they reduced that to & # 39; essentially flat & # 39 ;.
Pre-tax profit decreased from 322 million euros ($ 482.35 million) in the same quarter of last year by 32% to 292 million euros ($ 326.03 million). Turnover at the corporate and investment bank division fell by 13%, mainly as a result of a rise in the price of fixed-income securities and shares, which fell by 19% and 18% respectively. The figures "emphasize how the bank is fighting a lost battle to turn itself around," Hewson said.
Deutsche is still recovering from various scandals, including a $ 7.2 billion settlement with the US Department of Justice in a case related to the sale of mortgage-backed securities in the run-up to the global financial crisis . The bank is also confronted with fines, legal action and the possible prosecution of "senior management" because of its role in a Russian money laundering system of $ 20 billion, British newspaper Guardian reported last month, citing a confidential internal report
In addition, several US government authorities, including the US Home Intelligence and Financial Services Committees, and the House Ways and Resources Commission, and the New York Legal Authorities are investigating the bank record of loans to President Donald Trump family business the Trump organization. . Added to this specific set of headwinds, yesterday, Trump, his children and his real estate companies filed a federal lawsuit to prevent Deutsche Bank (and Capital One Financial (NYSE :)) from fulfilling the summons of the congress of harassment.
Regarding Commerzbank, the German government still holds a 15% stake, following a bailout in 2009. Profitability is being put under pressure by toxic assets, including a portfolio of 8.4 billion euros ($ 9.38 billion) ) to high-risk Italian government debt.
Commerzbank Weekly TTM
Although the Deutsche bank managed to make a small annual profit last year, the first in four years, Commerzbank's return does. Shares of both lenders have lost more than a third of their value in the past year. In the past decade the falls have been more than 80%.
Investors believe that the shares are worth less than the liquidation value of each company. Deutsche shares are already trading at around a quarter of the book value, the Commerzbank is around a third.
Collective market capitalization of European lenders Shrivels
The two German financial institutions are also not unique. Last year, the collective market capitalization of European lenders fell by 330 billion euros ($ 368.46 billion). At present, most major European banks trade at less than their book value.
As a group, they are valued at just 60% of their net assets, compared to a 10% premium for large American peers, according to Bloomberg data, quoted by Stephen Pope, managing partner at Spotlight Ideas, in a Forbes position. One of the reasons for the underperformance is that the European banking market is overcrowded, leading to declining profitability.
This, in combination with outdated business models, the persistence of negative figures and political uncertainty due to the Brexit and the rise of populism, is the source of the problems of the European banking sector, according to Pope.
Euro Stoxx Banks Weekly
It has decreased 22% in the last 12 months. Despite the tempting valuations, most European bank shares may be better left to risk holders.
Of course, not all European donors are created equal. The British Lloyds Banking Group (LON :), (NYSE :), which, similar to Commerzbank, also needed state support during the financial crisis, has been seen as a success story for the turnaround. The chief executive, Antonio Horta-Osorio, sold foreign assets, revised the bank's range and modernized his technology, allowing the British government to leave the lender.
Lloyds shares have won 30% this year. Last year's profit before tax rose 13% to £ 5.96 billion ($ 7.70 billion), he said in February. The income report can be seen this week. The return on tangible equity (ROTE), a measure of profitability, was 11.7% last year, compared to 8.9% in 2017. The bank's ROTE target for this year is 14% -15%. Deutsche Bank's ROTE target for 2019 is 4%, the lowest of its competitors.
