The German banking sector should be able to withstand stresses resulting from exposure to peripheral Europe, with the possible exception of Commerzbank, which has a high level of PIIGS exposure, according to Michael Rohr, head of financials at Silvia Quandt Research.
Rohr told CNBC he expects a haircut of around 20 percent on peripheral holdings of German banks, which has been reflected in recent tumbling share prices, but he added Commerzbank was a "special case".
"We've put on a 40 percent haircut on Greece on average and we've added 25 percent for Portugal and Ireland to reflect the risks that are going on there and finally we've put on ten percent for Italy and just five percent on Spain," Rohr explained.
Commerzbank's second quarter profits were hit by 760 million ($1.07 billion) due to impairments on Greek sovereign debt, posting a quarterly pre-tax profit of just 55 million euros ($79 million) on Wednesday, well below a Reuters forecast of 105 million euros ($151 million).
"Commerzbank is a bit of a special case, we've seen a very large capital increase, highly dilutive to shareholders and that's been a major part of this underperformance," he added.
Rohr explained that Commerzbank, in addition to its PIIGS exposure, was also the most exposed to the German "Mittelstand" of small and medium-sized businesses, therefore making it more vulnerable to further economic slowdown.
Despite second quarter profits being all but wiped out, Germany's second biggest lender said said it expected 2011 operating profit to be well above that of 2010 in its core banking operations.
Beyond Sovereign Debt
In addition to the impact of the sovereign debt crisis on German banks, Rohr said investment banking activity by Deutsche Bank would be hit in the third quarter.
"I believe it will be very tough for them to show a very strong Q3, because we've seen such a strong correlation between asset classes, so trading opportunities have minimized there's been a very low activity in July," he said.
However, he added that domestic asset quality should stay strong within the German banking sector.
"If you look into asset quality from a German perspective, you can definitely say that it's been improving over the past few quarters and it's potentially set to improve even further," Rohr told CNBC.
"Of course given that we had very strong economic growth in the first two quarters of this year in Germany, we will see slowdown and this will potentially lead to some higher levels of charges going forward… nevertheless, I believe that domestic asset quality should stay relatively strong," he added.
Rohr praised Aareal Bank for a "very, very solid stock performance" and for managing to stay profitable throughout the financial crisis, tipping their stock as the best buy among German banks.
"Their funding is safe and sound and they have a liquid balance sheet and their stock is trading at 40 percent discount to tangible book value and I believe it's unjustified if you look into the fundamentals of their business model," he said.
Rohr stressed that Commerzbank stock remained the riskiest due to the bank's exposure to faltering euro zone economies.