With the recent Deutsche
Bank upheaval which could be a reminiscent of the Lehman crisis. Have decided
to read up more and here are some of my findings.
Let’s take a look at
some statistics first:
Price- 13.5 USD
DB market
Cap- 18.5 billion USD
Potential Fine from
DOJ- 14 billion (Fine for their part in selling toxic mortgage backed
securities during Lehman’s time)
Derivatives Exposure:
42 trillion
Price to Book: 0.25
Latest Year End Loss:
6.8 billion Euros
Debt to Equity: 2.8
The current worries of the market are mainly due to the fine and also huge derivatives exposure as it beats the exposure Lehman (85 billion) had heads down. There have been talk that the fine could be negotiated down and a rumored amount of 5.4 billion was spreading through the grapevine and this caused a positive surge for DB shares.
Let's first look at the
DOJ fine, which I believe could be negotiated to the extent; whereby
progressive payment is doable. It would also not be DOJ's best interests to
force DB to insolvency,
As for the derivatives
exposures, though it looks huge and simply mind blowing. However, these may be
hedged positions (a buy position will have a sell leg and this is to allow trading
of the spread differentials of a nearer month to a further month). Their
interest rate derivatives took up 70 percent of their exposure. My guess will
be they could be executing trading strategies that are similar to Long Term
Capital Management Fund ("LTCM"). LTCM was really successful at the
start but things began to go hey-wire when they try to go into areas that are
not their forte to drive positive returns.
Looking at the net
exposure which they will take the long positions and minus the short positions
and after further netting the positive and negative figures; we actually have a
positive net market value of around 18 billion. In other words, if I interpret
correctly, their derivatives exposure are actually netting a gain as of Dec 31
2015 annual report. However as most are OTC contracts, therefore we have to
take the valuation with caution too.
My personal opinion -
The real issue with Deutsche Bank is actually profitability whereby they lost a
whopping 6.8 billion Euros in 2015 due to impairments, increase in
administration charges and litigation charges.
Given the current
situation whereby hedge funds are withdrawing funds and even their asset
management business is likely to see an outflow of funds; along with the
current stagnant economic conditions, their investment banking business should
not be the black knight to the rescue. The odds of a quick rebound could be
unlikely.
For the path of
recovery, confidence is paramount to the banking business. They may need some
form of assurance from the German government to the investment community of
their commitment to aid the bank if need be in order to stabilize the ship
(Something like MAS's stance during the Global Financial Crisis). If not a bank
run could be on the cards as they have close to 500 billion worth of deposits.
There may also likely to be another round of fund raising to beef up their
capital requirements.
In summary, a collapse
of Deutsche Bank in the footsteps of Lehman is a low probability event. Given
that Lehman's books are toxic derivatives backed by junk mortgages, the
derivatives exposure of Deustche Bank should be much safer (If the valuation of
their OTC contracts can be trusted) especially after we look at their net
positions. However, the road to recovery is still some way ahead and it could
still be the lingering negative catalyst in the near future for the global
markets given the scale and reach of the largest European Bank in the world.
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