Cerberus, an Unlikely Wedding Planner for Germany's Banks

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(Bloomberg Gadfly) -- When you've made a killing by investing in one unloved, barely profitable German bank, it makes sense to do it all over again.

U.S. private equity investor Cerberus Capital Management has taken a 3 percent stake in Deutsche Bank, worth about 1 billion euros ($1.2 billion) at current market levels, Bloomberg News reported on Wednesday.

This comes after the fund's July disclosure of a 5 percent stake in rival Commerzbank. Since then, shares of the bank have risen to about 10 percent above the estimated average price Cerberus paid, according to Bloomberg data.

There's doubtless hope lightning can strike twice. Cerberus clearly sees value in beaten-up euro zone banks, and is willing to increase its exposure. In a statement, the fund talked up Europe's attractive fundamentals, Germany's robust economy, and long-term investment opportunities.

That's all valid. But this is about putting money on the most downtrodden banking stocks out there: Commerzbank and Deutsche Bank trade at the steepest discounts to book value among their peer group, according to Bloomberg Intelligence.

Is there some grand plan at work to push both banks together, given the immense pressure on Germany's fragmented banking system to defend market share, strip out costs and invest in technology?

That seems a stretch. While logical in the long-term, a merger now would raise political hackles over job losses, spook regulators over balance-sheet bloat and increase management's already tough restructuring workload. Takeover speculation, which has helped Commerzbank's share price, has likely been an unexpected bonus for Cerberus.

This is nonetheless good news for Deutsche Bank CEO John Cryan, who has been battling investor gloom since a weak set of quarterly results highlighted just how tough the environment is for Deutsche Bank's core fixed-income division.

The bank has replenished its balance sheet and has promised to become a more German, more diversified bank over the coming years. Cerberus's investment appears to back that strategy and give a sign to markets that the gloom is unfounded.

Where things get tricky is judging whether Cerberus will find it easy to replicate its Commerzbank winnings. Deutsche is cheap --but has been so for several years.

The German economy's out-performance has done little to help the bank. Many of its problems are a result of years of risk-taking and its entrenchment in trading businesses that have been squeezed by a decade of post-crisis regulation and cheap central-bank cash.

Analyst expect Deutsche Bank's stock price to fall over the next 12 months to 14.45 euros, about 8 percent below today's level.

As a symbolic message of investor appetite for euro zone risk just as central banks start to reel in monetary stimulus, Cerberus's move has done the job. The jury is out on whether profits will follow.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

©2017 Bloomberg L.P.

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