After the merger, the reform pressure on the Deutsche Bank increases

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FrankfurtBarely a week ago, Deutsche Bank and Commerzbank ended their talks about a possible merger. Deutsche Bank CEO Christian Sewing has since been trying to spread confidence on all channels. Germany's largest financial institution is well on its way and could become more profitable without a merger, said the 49-year-old, for example, in an interview with the "Frankfurter Allgemeine Sonntagszeitung". The institute had recently lowered its costs and improved its profitability step by step. "I am confident that sooner or later this will be reflected in our share price."

However, most analysts do not share Sewing's optimism. They are of the opinion that the CEO is starting to run out of options after the collapse of the merger talks with Commerzbank. Some experts are calling for tougher cuts in investment banking – but at the same time voicing doubts that Deutsche Bank can even afford them.

"A merger would have given Deutsche Bank more time to rebuild its global organization," says analyst Dierk Brandenburg, who heads the banking team of the Scope rating agency. Now the management had only a few options left. These included increased austerity efforts and a reduction in low-performing investment banking, which ties up an excessive portion of capital.

Credit Suisse analyst Jon Peace expects the bank to lose more market share in the marketplace as it struggles with high refinancing costs while cutting costs and improving its leverage ratio. "Despite its poor profitability, Deutsche Bank has so far refused to present a revised strategy for higher profits," Peace criticizes. He therefore downgraded the stock from "neutral" to "underperform" and lowered the price target to € 6.50.

On Monday, the paper of Deutsche Bank fell by about one percent to 7.27 euros.

The analysts of the broker CFRA lowered their rating for the institute from "hold" to "sell" – and are therefore in line with the trend. According to financial data provider Bloomberg, 17 analysts recommend selling Deutsche Bank shares. 13 argue for holding the paper. Only an expert advises to buy.

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The Commerzbank share is getting off better. Here ten analysts recommend a buy, eleven a hold and three a sell. The second-largest German private bank wants to stick to its previous strategy on the whole and is also considered as a possible takeover target for foreign banks – so it has several options.

The analysts of Citi also suggest clear skepticism. Sewing's plan A to stick to the current strategy and hope for an improvement in the market environment is no longer realistic, they say. The ECB would delay a rate hike. And the volatility in the markets, from which banks can benefit, decreases rather than increases.

After the cancellation of the Commerzbank merger, the Deutsche Bank actually left only one option, write the Citi experts: "an even more radical restructuring of the investment bank, possibly with a withdrawal from the US and from the stock trading". However, such a step would entail high one-off costs that would weigh on Deutsche Bank's earnings and capital base, the analysts warn.

Like most experts, they have great doubts that the Frankfurt bank can increase its return on equity in the current year as targeted to four percent. On average, analysts expect 2019 currently only a return of 1.5 percent.

"Either it will take a long time for Deutsche Bank to improve its earnings from the inside out, or it needs to take more drastic measures that are likely to bring significant one-time costs and higher implementation risks," write the Royal Bank of Canada analysts.

Sewing has announced that after the collapse of the Commerzbank merger, he wants to look further at ways to grow faster and make more profit. According to financial circles, Deutsche Bank is currently examining a merger of its subsidiary DWS with the fund business of the Swiss bank UBS.

If Deutsche Bank reduces its share of DWS by almost 80 percent, this would strengthen the capital base of the bank, say the Citi analysts. They add, "We do not believe that this alone would be enough to solve Deutsche Bank's problems."

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