The Morning Porridge - what next for Deutsche?
Blain’s Morning Porridge September 27nd 2016
“I don’t hear a word they’re saying, only the echoes of my mind…”
Apologies for yesterday’s lack of porridge – train problems left me stranded outside Waterloo and by the time I made the office.. it was “busy”. But this morning we’ve a number of issues to think about. What’s really going on with Deutsche Bank, the Clinton/Trump face off, and the primary bond market.
A number of blogs, articles and learned gentlemen are talking about how Deutsche Bank is ensnared in the gravitational pull of the “death spiral”, being drawn to the Event Horizon of the same Black Hole that delivered the Bear/Lehman quietus moments we saw eight years ago. We’ve seen Merkel deny there will be any state aid given to the troubled bank, but German business leaders are on the wire saying it’s far too important to the German economy to let go.
Desperate days indeed…perhaps. It might well yet blow over, but…
These same German businesses saying it will be bailed out.. aren’t doing new business with the bank. Or so I’ve heard. You have to understand the Germans. They are brilliant engineers, but finance isn’t close to their hearts. They don’t particularly care much for modern finance. That explains why local banks with local connections like the Landesbanks remain so important – they are functional parts of the local economy rather than global behemoths. While they would fight tooth and nail to save VW or Siemens, I doubt Germans will be that bothered if DB falls.
While the past is a good guide to the future, it’s not nailed on.
I very much doubt we’ll see a Lehman moment re Deutsche. Its problems are substantial but fall into tangible and intangible. If it goes under there will be hell to pay – a bank brought down by a frankly outrageous (but actionable) US mortgage trading fine would cause a very messy US/Europe trading spat. But it may still – in which case I suspect it will be a bailed-out to become a German analogue of RBS.
On the tangible side; further court cases to come, a weak capital position that could see dividend stoppers on its CoCos triggered, a failed US bank test, its pull back from its core investment banking franchise, massive and hurried deleveraging, and morale within the institution that must be at rock bottom: these are the things we know.
What we don’t really now is just how bad the rumoured holes in derivatives books might be. Read the blogosphere and it tells us derivatives are Euro 615 bln out of Euro 1.8 trillion assets, with a positive net value of Euro 18 bln – but that number lacks transparency, has been volatile in recent years bouncing by nearly 40% y-t-y, and is difficult to really quantify.
In terms of the value of the bank – trading at a massive discount to NAV – it now feels like a game of politics: wondering how the government can “assist” ahead of an election, and even wondering if it needs to. After all, Deutsche is not a retail bank, Germany has plenty of commercial banks… and no one cares for investment banks. Yet Deutsche is a massive lender in Germany.
Will a Deutsche “moment” cause a systemic collapse across Europe? I doubt it. We’re better prepared and ready – and central banks have worked out the buttons to press and levers to pull.
Don’t forget, DB is not the only European name in trouble. Someone reminded me yesterday Unicredit faces a massive shortfall it plans to meet from Euro 16 bln of asset sales (crown jewels like Pioneer) and a rights issue of Euro 6 bln. And, it’s supposedly the best of the Italian names…
Sadly, as I’ve written so many times before, unlike the US and even UK, European banking is essentially unfixed. As we go into new uncharted waters and banks being forced to raise new TLAC and MREL (Total Loss Absorbing Capacity vs Minimum Required Eligible Liabilities) liabilities, the ability of investors to value, understand and invest in bank paper becomes more and more difficult.
At the moment I’m being asked if Deutsche Stock, CoCos or Senior Debt are opportunistic buys. I’m aware accounts are shorting the stock and going long the CoCos – which could well end up a Double Whammy. Even the Senior Debt is widening – but would the German government really allow a situation where senior debt holders are bailed in?
It’s a situation to keep a weather eye on.
Meanwhile, markets have gone up after giving a points-win to Clinton on last night’s debate. That’s short-term knee-jerk foolishness. I can’t help but think it’s irrelevant what the experts or even the “unbiased audience surveys” say about last night’s result. Trump support is more entrenched than the establishment think and as more and more senior Republicans get comfortable with supporting him (on the basis he can be “controlled”, will appoint “experts” and will be “pro-business”) his machine will roll forward.
The market is likely to remain “reactive” to every piece of news ahead of the vote. And then I’m hoping it proves a Brexit moment – I do hope we are worrying too much.
Back in bond land.. interesting to see Lufthansa pull its bond deal y’day, confirming our sense the primary bond markets are getting more difficult and sticky. What next we wonder.. interesting to see if any European bank feels like funding?
Finally, the attached photo this morning shows what I was up to at the weekend, helming my friend’s beautiful classic yacht “Thalia” at the Hamble Classics Regatta. Best weekend sailing I’ve had this year.. The photo might cheer you up as you consider the sheer misery of markets..
Out of time and back to day job..
Bill Blain
Mint Partners