The new coronavirus outbreak will weigh on Deutsche Bank AG's restructuring efforts as the market turmoil triggered by the pandemic and its economic impact will leave almost none of the group's businesses unscathed in 2020, according to analysts.

The German group said in its 2019 earnings report released March 20 that its ability to meet financial targets could be "materially adversely affected" due to a prolonged economic downturn triggered by COVID-19, the disease caused by the virus. The bank confirmed its 2020 targets for adjusted costs of €19.5 billion, a common equity Tier 1 ratio of at least 12.5% and a leverage ratio of 4.5% but said those do not include COVID-19 effects.

The overall outlook for the European banking sector is gloomy with all institutions likely to face severe short-term revenue pressure, but banks with preexisting profitability issues will be the most vulnerable to the virus-induced hit, analysts said.

READ MORE: Sign up for our weekly coronavirus newsletter here, and read our latest coverage on the crisis here.

"Banks with a weaker capital generation capacity to start with, such as Deutsche Bank, may find it more difficult to absorb potential weakening of earnings in our view," ING analysts wrote March 20. As loan loss levels rise amid the outbreak European banks will see "a material reduction in profitability" with Deutsche Bank facing a potential 21.4% drop in pretax profit if loan loss provisions rise by 10 basis points, UBS analysts said in a March 11 note.

Owing to heavy restructuring costs, Deutsche Bank posted a preliminary pretax loss of €2.63 billion for 2019, compared to a €1.33 billion pretax profit a year earlier.

Outbreak ends short-lived stock price recovery

Despite the losses, Deutsche Bank's progress in its latest revamp, seen as its most radical so far, gave investors and market observers more confidence in the group's chances for a turnaround. The bank hit deleveraging targets faster than expected and has taken a smaller-than-expected hit from exiting its equities trading business, S&P Global Ratings analysts said at the time.

Deutsche Bank's stock price surged after its 2019 earnings release Jan. 30 and broke through the €9 mark for the first time since November 2018 as U.S.-based Capital Group bought a 3.1% stake on Feb. 6. But the share price surge was short-lived as fears of COVID-19 spreading across Europe and the U.S. hit the markets at the end of February. The market turmoil worsened in March with bank shares being among the worst hit.

Negative revenue effects

One of the main factors for Deutsche Bank's strategic recovery is revenue growth. Positive momentum in revenues and in client activity across all four divisions of the group, including its investment bank, asset management business, private and corporate bank, were named as positive signs of progress by S&P Global Ratings.

But with equity and bond market sell-offs at crisis levels and central banks rushing to ease the strain on the economy with further rate cuts, the revenue environment will become challenging in the short term. Increased pressure on net interest margins, a decline in new lending volumes, lower fee and commission income due to capital market volatility and a rise in impairment charges, will weigh on 2020 bank profitability, ratings agency DBRS Morningstar said in an analysis March 16.

Deutsche Bank, in particular, is expected to face negative revenue effects in almost all of its lines of business, including large parts of the investment bank, as the economic impact of COVID-19 has quickly moved from Asia, which constitutes about 20% of the group's revenues, to all major economies, impacting almost all industries, Sonja Forster, a vice president in the European financial institutions team of DBRS Morningstar, said in a written comment.

There is a silver lining, however, as Deutsche Bank's improved liquidity, capital positions and its lower risk profile will help it mitigate some of the woes, Foster said.

Market pressure

Nevertheless, investor concerns about Deutsche Bank's ability to handle the situation have spiked as the group's credit default swap spreads have widened much more than those of other large European peers and have approached 2016 levels when creditors were worried that Deutsche would not be able to meet its debt payment obligations ahead of a large regulatory fine.

Increased credit spreads and distorted capital markets among others may prompt borrowers to increase their drawdowns of available bank credit facilities, Moody's said in a note March 18. Despite the sound liquidity position of global investment banks, Deutsche is more prone to outflow risk than other institutions in that group due to its exposure to large corporates, the rating agency said.