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Wednesday, 21 September 2016 15:36

An Analysis of Deutsche Bank's Likely Recapitalization - German Tax Payer Bailout or German Bank Depositor Bail-in? Featured

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Deutsche Bank is going to need some money, and it's going to need some quite soon. The next two or three articles that I write will focus on why there is such a need. In a concerted effort to reduce or potentially eliminated the risk of taxpayer-funded bailouts of European banks, the EU implemented a new “bail-in” regime beginning on January 1, 2016. As such, new rules require banks and certain systemically significant market participants in EU member states to write-down, cancel, convert into equity or otherwise modify certain unsecured liabilities if such steps are required to recapitalize the institution. What are the most bountiful unsecured liabilities of a bank?

Screenshot 20160922-081728-picsay

More than 50% of DB's total derivative contracts are going to be matured within 1 year and more than 80% within 5 years. So, in the current sluggish economic environment it is quite possible that Deutsche Bank will experience some losses in their derivative exposure as most of their counterparties are located, and have a high degree of exposure, in Europe and the USA. This will impact the financial conditions of DB as well as its counterparties. 

DB notional derivative amounts due within 1 year 2014 to 2015

Even without market losses (and there's plenty of reason to believe those are coming), DB will have a hell of a time with added credit expenses due to its lower credit rating (use both rating agencies and bank's internal scoring models). Reference Deutsche Bank as Ground Zero?:

DB credit woes

There will be some losses and conflict upon resolution of some of these. How do we know? We believe we have identified the major counterparties of DB and at least one has booked a material profit for the derivatives that DB booked a loss for. Of course, that loss was booked before DB changed their valuation methodology, which now makes it a profit. Hat tip to Mish's Blog 


Almost 50 % of Deutsche bank’s risk profile (both risk weighted assets & Economic Capital) is dominated by their Corporate Banking & Securities Division, mostly because of the trading activities related with this division.    

Noticeably, in first quarter of 2015 Deutsche Bank adopted a new methodology to determine “Diversification benefit”, resulting in an overall reduction of risk by 2.3 billion euros from 2014 to 2015. Because of this new methodology Deutsche Bank’s total risk reduced significantly. but... The methodology for the calculation of diversification benefit is not mentioned in their Annual Report. Without that it cannot be clearly substantiated whether Deutsche Bank is shuffling bad loans to a different unit and classification in order to make their NPAs look better. One thing is for sure, it definitely does look fishy!

Do you know what smells even fishier? The high probability that DB uses this "new found risk calculation metric" to determine the cost of capital for their level 2 and level 3 assets. Voila! Instant profits, Mr. and Mrs. Investor! Yeah, right? You see, DB counterparties are not going to want a hyped up model input as payment, they're probably thinking more along the lines of cash. Add to this, the 50+% drop in share price, 0.25x BV multiple, and the multiple lawsuits, including the DOJ's request of $14B dollars (from a $17B market cap), and you have a pretty stringent need for a recap. I will supply even more (actually, much more) fodder for capital contemplation of the nest week. Of course, no one is bringing this point up except for us. I could very well be wrong, I just wish for someone to show me where...

Our next article will continue to hammer home the liklhood that DB will have to recapitalize, and where they probably WON'T be getting the money from, as well as the likelihood it will come from someone who really didn't plan on giving it up (Ahem, depositors/savers/checking account holders). For those who are not yet convinced, peruse these related items...

The research and knowledge subscription module "European Bank Contagion Assessment, Forensic Analysis & Valuation" contains a full report of a very large European Deutsche Bank counterparty that faces a full 27% downside from current levels. It appears as if no one suspects a clue. It also contains much, much more (including at least 3 to 5 suspect banks). We can break this apart a la carte, if requested.

As excerpted:

Susceptible Bank 1: Financial Modeling
Read 12309 times Last modified on Monday, 26 September 2016 08:43


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  • Comment Link JMiller Sunday, 25 September 2016 15:05 posted by JMiller

    Insured depositors and secured creditors are exempt from being part of a bail-in. Unfortunately Mr. Middleton does not make this clear but instead misleads people into thinking that any and all deposits could be used to recapitalize the bank.


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