Photographer: Krisztian Bocsi/Bloomberg

Deutsche Bank’s Woes May Be ‘Insurmountable,’ Berenberg Says

  • Berenberg cuts shares to sell on over-leverage; sees 40% drop
  • Cryan can’t ‘escape vicious circle’ without raising capital

Deutsche Bank AG is stuck in a vicious circle as co-Chief Executive Officer John Cryan seeks to overhaul an impaired business that needs more capital, which the bank would struggle to raise if it tried to tap investors, according to Berenberg.

The Frankfurt-based lender’s biggest problem is excessive leverage, Berenberg’s James Chappell wrote Monday in a note that said the bank faces “insurmountable headwinds.” He cut his rating to sell from hold and reduced his target price for the stock to 9 euros per share, the lowest among more than 30 analysts tracked by Bloomberg and about 40 percent below current levels.

While Cryan, 55, has scrapped dividends, earmarked businesses for sale and pledged to eliminate thousands of jobs, Deutsche Bank earnings have been undermined by 12.6 billion euros ($14 billion) in costs linked to past misconduct. Efforts to sell assets may be hampered by illiquid credit markets, while Cryan will also struggle to boost capital as the investment-banking industry is in “structural decline,” Chappell wrote.

“It’s hard to see how Deutsche Bank can escape this vicious circle without raising more capital,” Chappell wrote. “The CEO has eschewed this route for now, in the hope that self-help can break this loop, but with risk being re-priced again, it is hard to see Deutsche Bank succeeding.”

Shares in Deutsche Bank have dropped 35 percent this year. That’s among the worst performers in the 39-member Bloomberg Europe 500 Banks and Financial Services Index, which dropped 23 percent. They closed at 14.68 euros on Friday, with Monday a public holiday in Germany.

The company trades at about 39 percent of tangible book value, the lowest ratio among the top global banks, according to Bloomberg data. That means they are worth less than investors would expect to receive if the firm liquidated assets. Credit Suisse Group AG, which last year raised capital to help restructure its businesses, is trading at 65 percent.

Eleven analysts recommend selling Deutsche Bank shares, while 21 have a hold rating and six suggest buying the stock, according to Bloomberg data. The lender’s average 12-month price target is about 18 euros, with analysts at Goldman Sachs Group Inc. forecasting shares to reach 23.80 euros.

Cryan has already signaled that Deutsche Bank may post another loss this year, hurt by restructuring costs and charges ties to past misconduct.

Chappell cut his estimate for Deutsche Bank’s earnings-per-share by about 35 percent for 2017 and 2018. He predicts the lender will earn about 2 euros per share in 2018.

‘Difficult’ Move

Chief Financial Officer Marcus Schenck last month signaled that Germany’s largest lender may have more time to build up capital buffers and is looking at ways to speed up cost cuts. The bank has “at least one more year to get the relevant ratios,” compared to what executives had expected in October, Schenck said April 28.

In March, responding to investor concerns, Cryan told Frankfurter Allgemeine Zeitung that while he can’t rule out a capital increase “as a matter of principle,” the lender sees “other opportunities” for meeting tougher regulatory requirements.

Chappell wrote that markets “don’t exist in the size nor pricing” for Cryan to achieve that goal through asset sales, and the firm’s core business is under pressure. “Seeking outside capital is also likely to be difficult as management would likely find it hard to offer any type of return on new capital invested,” he wrote.

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