Barclays says talk of any Deutsche Bank merger is a red flag for earnings — and the UK bank is slashing its price targets

  • German authorities are ramping up discussions about a possible merger between Deutsche Bank and Commerzbank, the Financial Times reported.
  • Bloomberg said regulators seek to merge Deutsche Bank with a different European lender.
  • “We think the reason for these headlines is that profitability may have deteriorated further in the fourth quarter,” Barclays analysts said as it cut its profit and stock price estimates.
  • “We think there is a reasonable chance Deutsche Bank preannounce Q418 results,” Barclays said.

Barclays analysts say they see red flags in reports about Deutsche Bank potentially merging with another rival.

“We keep seeing press articles that Deutsche Bank will merge with another bank,” Barclays analysts led by Amit Goel said in a report Thursday.

“We think the reason for these headlines is that profitability may have deteriorated further in the fourth quarter of 2018, and that the current strategy/targets are looking less and less viable.”

Barclays is thus cutting adjusted profit before tax estimates by 3%, 5%, and 7% for last year, this year and 2020, respectively. That’s below Deutsche Bank’s own targets, the report said. The UK bank also cut its price target for Deutsche Bank stock to 7 euros from 8 euros.

The Financial Times reported on Thursday that the German finance ministry asked the banking regulator to share the results of its analysis of a potential merger between Deutsche Bank and Commerzbank. And Bloomberg on Wednesday said German regulators prefer that Deutsche Bank merge with another European firm, not Commerzbank.

“It is not clear to us why another bank would look to merge with Deutsche Bank,” Barclays said. “Given the size of the balance sheet (1.4 trillion euros) and the current state of Capital Markets Union, amongst other factors, there would be several impediments to a cross border transaction.”

Deutsche Bank shares fell more than 50% in 2018, hitting record lows on numerous occasions.

“We think there is a reasonable chance Deutsche Bank preannounce Q418 results,” the report said. The bank is scheduled to report earnings on February 1.

Takeover or merger talk is nothing new for Deutsche. Citigroup CEO Michael Corbat has reportedly in the past told German business publication Manager Magazin that there was too much “overlap” between Citigroup’s and Deutsche Bank’s businesses, and that a takeover based purely on cost savings wasn’t a good idea.

A combined German lender is said to have been on the country’s agenda for a while in an attempt to prevent the exodus of foreign capital from the economy and create a banking heavyweight.

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