German lenders are in a uniquely dangerous position compared to their European counterparts, according to Ronit Ghose, global head of banks research at Citi.
The European banking sector has been struggling with profitability ever since the financial crisis, with the sector's second-quarter earnings down 7% year-on-year. Many have cited persistent low interest rates from the European Central Banks (ECB) as their biggest obstacle in the path to profit.
The Stoxx Europe banks has fallen 45% over the past 10 years. This in comparison to the U.S.-focused KBE bank ETF, that tracks banks stateside, has added 86%.
Pressure from the low rate environment has been compounded by a global economic slowdown, trade tensions and geopolitical uncertainty, but a combination of structural vulnerability and domestic economic weakness renders the outlook for German banks all the more bleak.
Italian banks have recently seen share prices hit by domestic political chaos, after Matteo Salvini's Lega party blew up the governing coalition arrangement, but speaking to CNBC's "Squawk Box Europe" on Thursday, Ghose said that from a profitability perspective, German lenders are in "a much worse position" than their Italian counterparts.
"The Italian banks have done some cleanup on their balance sheets, like the Spanish banks. The Germans next year are going to make 2-3% return on equity (ROE), and this year will be even worse," he said.
Restructuring and cost cutting now permeate European banks' strategies, but Ghose suggested the most effective programs have been concentrated in Scandinavia and the Benelux region (the politico-economic union between neighboring states Belgium, the Netherlands and Luxembourg).
"Over the last 10 years they've halved branch networks, cut headcount, and they've done it because of two things: they have flexible labor markets, and they have smart management teams. They are forward-looking, they have used digitization and restructuring well," he said.
During the last earnings season, however, French banks showed early indications of progress in restructuring efforts on the whole.
"The market applauded this in the second-quarter earnings season," he said.
"The French began to talk about cost-cutting, they're going to show some progress, and the market is waiting for that."
By contrast, Deutsche Bank shares touched an all-time low on Thursday, falling to 5.81 euros per share during morning trade amid the latest market sell-off.
The German lender is in the process of a mass restructuring program which will see 18,000 jobs cut by 2022 worldwide and the closure of its equities sales and trading business, but investors have reacted with a degree of skepticism.
The bank's share price has been in decline for a number of years, with a host of structural and wider economic challenges exacerbated by a string of scandals relating to anti-money laundering failures.
Domestic rival Commerzbank, the subject of a failed merger deal with Deutsche this year, has also seen its share price plunge over the past 18 months.
