Deutsche Deal Failure Points to U.S.-European Bank Divide
U.S. banks since the financial crisis have largely lapped their European counterparts
The scuttled tie-up between Deutsche Bank AG DB -1.92% and German rival Commerzbank AG CRZBY 3.09% underscores the uneven recovery between lenders on either sideof the Atlantic and how decisions made during the financial crisis are reverberating today.
The possible bank merger in Germany was supposed to put Deutsche Bank, a global player in trading and investment banking, on a path toward profitability and stability. Instead, the firm is now left vulnerable as its core global businesses continue to lag behind those of its U.S. competitors.
And the latest bank earnings reports show the trans-Atlantic gap is widening.
After disclosing last week that deal talks fell apart, Deutsche Bank said it earned €200 million ($222 million) in net income for the first three months of the year and revenue from its investment-banking unit fell again. Meanwhile, JPMorgan Chase & Co., the largest U.S. bank, reported earlier this month $9.18 billion in first-quarter earnings, more than 40 times Deutsche Bank’s.
The U.S. bank’s shares have risen around 17% so far this year and are valued at about 1.6 times book value.
One of the U.S. banks hit hardest by the financial crisis, Citigroup Inc., said it earned $4.7 billion in the first three months of the year. Its shares have risen 34% this year, on pace for their best annual gain in seven years.
Deutsche Bank, meanwhile, is up just 5.4% this year, after sliding 5.7% last week. It is valued at just a quarter of book value.
The differences reflect widely varying profitability. JPMorgan reported a 12.6% return on equity for 2018 and Citigroup clocked in at 9%. Deutsche Bank’s return sat at 0.4%.
European banks more broadly, and not just Deutsche Bank, have been struggling since the financial crisis. That is in part the result of the weak macroeconomic environment, the eurozone crisis and negative interest rates that weigh on profits.
“If you’re looking for a rebound or improvement in profitability and growth among European banks, they have to do that in a flat or declining rate environment,” said Ken Leon, CFRA director of equity research. “That’s hard.”
European banks have lagged also due to decisions made during and after the crisis. In the U.S., banks were forced to take government funding, more quickly recognize losses and shore up their balance sheets. In Europe, banks were slower to clean up loan books or bulk up equity buffers.
“The U.S. banks took their medicine early in terms of recapitalizing their businesses,” said Devin Ryan, a senior analyst at JMP Securities LLC who focuses on investment banks. “There’s a lot of evidence that banking in the U.S. is much better positioned today than a decade ago and better than Europe.”
U.S. banks today are viewed as among the strongest in the world. In Europe, banks continue to limp along and nearly every major financial firm trades below its book value, or net worth—a sign of market distrust. Deutsche Bank is one of the most extreme examples, both in terms of valuation and market size.
Citigroup and Deutsche Bank illustrate the contrast. Before the crisis, Citi’s market value was about $200 billion greater than that of the German bank. In mid-2009, Deutsche Bank was worth nearly $30 billion more.
As Citi climbed out of its hole and began to repair its balance sheet, its market value steadily rose back above that of Deutsche Bank. Today, Citi is again worth about $150 billion more than Deutsche Bank.