Why Deutsche Bank will not lead European banking consolidation

Deutsche Bank has long hoped to become a global banking powerhouse.
Its mediocre rating belies it.
The German lender is one of the world's cheapest banks, trading at five times future earnings and less than 40% of its tangible book value.
This makes market chatter about Deutsche buying another bank, such as local Commerzbank or Dutch ABN Amro, a decidedly unlikely prospect.
True, Europe's fragmented banking sector could use some consolidation.
But it's been like this for a long time.
While the ECB oversees eurozone banks, local regulation, such as national deposit schemes, complicates arrangements.
Then there's politics: A takeover of ABN by a German bank seems unlikely, given the Dutch government's shareholding.
The other issue is investor mistrust regarding the fair value of European banking assets and resulting bearish valuations.
Stoxx 600 banks trade less than 7 times forward earnings.
US laggards like Citi also score higher, 9x and 0.6x tangible book.
This means that European financiers' cost of equity is high, above 15%, when many of them earn less on their capital.
Deutsche's shares are not valued well enough to create value if it wants to pay one of its regional rivals with shares rather than cash.
Meanwhile, spending down its hard-earned 13.9% common equity tier one capital buffer would annoy shareholders if it affected payouts.
Yes, even Commerzbank and ABN are trading well below their tangible book value.
For example, the former has a gap of around 16 billion euros.
Buying at a low enough price and revaluing your capital can bring accounting benefits.
When the stock is so submerged by the market price, it is called "negative goodwill".
UBS used this to good effect when it acquired Credit Suisse last year to absorb the losses needed to bring assets and liabilities back to their market price.
Credit Suisse's adjustment of around 14 billion euros is probably too high for Commerzbank, Mediobanca's Adam Terelak believes, despite their similarly sized balance sheets.
But a settlement could result in offsets to the same extent, eating up much of the negative benefit on goodwill.
The German state still owns 15% of Commerzbank and may not want to sell it at too low a price.
Ultimately, Deutsche Bank does not have the required valuation for these all-equity transactions, even after a stock rebound.
The cost/income ratio, equal to 73%, remains relatively high.
Investors' hopes for cost-cutting consolidation among European banks have been repeatedly dashed.
There's no reason to think Deutsche Bank will change that now.
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