Sunday, 16 June 2019

A Analysis

I was discussing the US Department of Justice $14B fine levied at Deutsche Bank with my 15 year old son last week. I told him the fine amounted to roughly 70% of Deutsche's market cap, while a similar retroactive tax levy from the EU towards Apple for $14B was about 3% of their cash on hand or a quarter's operating profit.  My son said, "Whoah! Waitaminute! I thought Deutsche Bank was a big company like Apple. Didn't you say that they had trillions of euros of assets on their balance sheet?".

Indeed, I did say such, and he brings up a very valid point that is missed by many a so-called professional. DB is valued at 14.5 billion euros by Mrs Market, yet that amount controlls 1.8 trillion euros worth of assets, and 1.415 trillion after netting and credit adjustments, etc. And to think, some people think a 90 LTV loan is pushing the leverate limiit. Let's take a look at this from a graphica perspective to illustrate just how absurd it is...

Over time, the accounting expression of equity diverges significantly from the markets perception of the bank's equity value.  Somebody is most assuredly mistaken! As of today, DB's books are carrying equity value at 3x that of the stock market. DB market leverage

 

If one were to use the stock market's equity valuation, one would see that a very, very tiny sliver of equity is controlling nearly 1.5 trillion euro of assets - and that's after the slimming down game is done. Expressed differently, DB is leveaged 97.4x. 

DB market-based leverage Ratio

For those who feel this is an unrealistice way of looking at things, run the same exercise for every failed bank and cross reference the results to that of the European banking regulatory body's methodology of calculating leverage and tell me which methid was (and is) the better predictor of bank failure.

Leverage ratio measures
(In EUR bn., unless stated otherwise) Dec 31, 2014 Mar 31, 2015 Jun 30, 2015 Sep 30, 2015 Dec 31, 2015 Mar 31, 2016 Jun 30, 2016 Sep 28, 2016
                 
Total assets 1,709 1,955 1,694 1,719 1,629 1,741 1,803 1,803
Changes from IFRS to CRR/CRD41 (264) (407) (233) (299) (234) (350)
(389)
(389)
Derivatives netting1 (562) (668) (480) (508) (460) (523) (556) (556)
Derivatives add-on1 221 227 198 177 166 157 157 157
Written credit derivatives1 65 58 45 42 30 31 24 24
Securities Financing Transactions1 16 20 21 22 25 25 35 35
Off-balance sheet exposure after application of credit conversion factors1 127 134 131 109 109 102 102 102
Consolidation, regulatory and other adjustments1 (131) (177) (148) (140) (104) (140) (151) (151)
CRR/CRD4 leverage exposure measure (spot value at reporting date)1 1,445 1,549 1,461 1,420 1,395 1,390 1,415 1,415
                 
Total equity 73.2 77.9 75.7 68.9 67.6 66.6 66.8 66.8
Market share Price$ 30.0 44.8 30.2 27.0 24.2 16.9 13.7 11.9
Market Cap$ 41.1 61.4 41.3 36.9 33.1 23.2 18.8 16.3
Market Cap EUR 36.6 54.7 36.8 32.9 29.4 20.7 16.7 14.5
Discrspency bet. Accounting & Market-based Equity 50% 30% 51% 52% 56% 69% 75% 78%
Simple, market price derived leverage (Equity/Net Assets) 2.53% 3.53% 2.52% 2.31% 2.11% 1.49% 1.18% 1.03%
Regulatory Accounting (Fully loaded CRR/CRD4 Leverage Ratio in %1) 3% 3% 4% 4% 3% 3% 3% 3%
Leverge Multiple 39.5x 28.3x 39.7x 43.2x 47.4x 67.3x 84.5x 97.4x
                 
Fully Loaded CRR/CRD4 Tier 1 capital2 50.7 52.5 51.9 51.5 48.7 47.3
48.0
48.0
 
               
Fully loaded CRR/CRD4 Leverage Ratio in %1 3.5 3.4 3.6 3.6 3.5 3.4 3.4 3.4
1 Based on current CRR/CRD 4 rules (including amendments with regard to leverage ratio of Commission Delegated Regulation (EU) 2015/62 published in the Official Journal of the European Union on January 17, 2015).
2 Regulatory capital amounts, risk weighted assets and capital ratios are based upon CRR/CRD 4 fully-loaded.
 
Here's my DB warning from 11 and half months ago...
 Our next article will continue to hammer home the liklhood that DB will have to recapitalize, and where they probably WONT'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...

Here's What A Real, Live Veritaseum 5x Short DB Smart Contract Looks Like to Our Research Subscribers 

 If you haven't heard, we're giving out free, fully smart contracts as a 5% rebate to anyone who purchases any of our research packages above the introductory novice $50 level. This is not your Daddy's rebate! The rebate actually gets larger as DB goes down in price. For those who may be coming late to the party, we can offer a 5x long gold (or even a long gold, short DB) smart contract rebate as well. Of course, the bulk of our research targets banks and entities other than DB, but I thought we'd make DB the subject of the rebate to drive the point home. Below is an actual contract crafted off of the price of a single share of DB for about 2 weeks.

 

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

During the financial crisis of 2008, money market funds who subjectively agreed to hold their NAV (net asset value) unit prices at $1 “broke the buck”. That is, the unit of share of the fund fell below $1 (the $62.5 billion Reserve Fund, to be specific, one of only two funds to “break the buck”), which was a significant problem for the investors who used (and considered) said money market funds as cash in the bank. All of a sudden, everyone’s cash account at the Reserve Fund just dipped in value. Uh Oh! This caused short term credit to literally freeze, worldwide, because others were concerned that their bank-like security and liquidity was no longer that secure nor liquid.

Regulators stepped in to make sure this didn’t happen again by demanding that all money funds who do not invest in sovereign securities (those entities who “should” be able to print their own monies, but we’ll get into that in a later post) allow their NAV to freely float with market prices.

The result? Money flew out of prime money funds into perceived safer vehicles.

Demand for government short term paper has increased (to the tune of hundreds of billion of dollars).

 

... and demand for private commercial paper, ie. banks, have dropped by a similar amount, materially driving costs - materially, as in doubling it!

What does this mean?

No, this is not a punishment. This is actually a good thing, for it forces money to have an appropriately derived price tag attached to it. Risky banks were being funded at the same risk rate as (less risky) sovereign governments. That didn’t make sense. Now the system makes more sense, and banks should be repriced according to their access to, and true cost of, capital. The true cost of capital means that banks can no longer hide behind fake LIBOR quotes to conceal their deteriorating credit metrics. Reference Wikipedia:

The Libor scandal was a series of fraudulent actions connected to the Libor (London Interbank Offered Rate) and also the resulting investigation and reaction. The Libor is an average interest rate calculated through submissions of interest rates by major banks across the world. The scandal arose when it was discovered that banks were falsely inflating or deflating their rates so as to profit from trades, or to give the impression that they were more creditworthy than they were.[3] Libor underpins approximately $350 trillion in derivatives. It is currently administered by NYSE Euronext, which took over running the Libor in January 2014.[4]

Look at what happened to LIBOR consistently after NYSE Euronext took over adminstration. Those spikes that you see previous to that takeover stem from the European sovereign debt crisis. Those numbers had been faked! No telling what the true level of stress really was. Well, this time around we may get to find out. To put this into perspective, the global money market industry is $2.6 trillion in assets. Deutsche Bank’s (a bank that is in trouble) balance sheet is almost $2 trillion dollars. JP Morgan’s balance sheet is $2.4 trillion dollars. Both of these banks have been shrinking their balance sheets.

As excerpted from Bloomberg:

With a seismic overhaul of the $2.6 trillion money-market industry weeks away from kicking in, money managers are bracing for a last-minute exodus of as much as $300 billion from funds in regulators’ cross hairs.

Prime funds, which seek higher yields by buying securities like commercial paper, are at the center of the upheaval. Their assets have already plunged by almost $700 billion since the start of 2015, to $789 billion, Investment Company Institute data show. The outflow has rippled across financial markets, shattering demand for banks’ and other companies’ short-term debt and raising their funding costs.

Interestingly enough, and as is par for the course, we see things differently from the Street, as also excerpted:

Financial firms paying higher rates to attract investors to their IOUs will push three-month Libor to about 0.95 percent by the end of September, according to JPMorgan Chase & Co.

Click here to read more about rising Libor rates.

Although bank funding costs are rising, it isn’t a signal of financial strain as in 2008, said Jerome Schneider, head of short-term portfolio management at Newport Beach, California-based Pacific Investment Management Co., which oversees about $1.5 trillion.

“This is not a credit stress event, it’s a credit repricing due to systemic and structural changes,” he said.

He’s right. It’s not a credit stress event… yet! But, the credit repricing will force a reality and discipline on an industry accustomed to near zero and negative interest rates that it is ill-fitted to handle, and thus in due time, it will likely provide at least a partial impetus for… “a credit stress event”.

NiM (net interest margin - the profit from actual old school banking businesses, ie. lending) is still quite sparse in banks. So, revenue is slim, but expenses to access said capital to conduct business are going up. That's never a good sign. Worse yet, the Fed has signalled it will, yet again, hold off on an interest rate increase - As I have been telling you since December of 2014.

The issue is, the Fed does not truly control the market, it simply manipulates it to the best of its ability. When it's ready, the market will raise rates on its own. Reference where short term rates are trending now, likely as reflection of the Fed not raising rates.

This is particularly true for the European banks...

Our next post will describe how well Deutsche Bank is prepared for such an event. Stay tuned, and if you have not already done so, subscribe to our long/short, macro and educational research (including blockchain tech) - see Corporate Valuation & Equity Research.

We have a brand new DB report out today, reference Derivative Risk Exposure of Major Banks to Deutsche Bank.

Thursday, 25 August 2016 15:01

How Deutsche Bank Can Destroy Europe

How can Deutsche Bank destroy the EU? Capital fight and extreme, involuntary deleveraging. DB is closing nearly 200 German bank branches. Not a big deal, right? German bank's depositor base is 111% of German GDP. A run on German banks is literally a run on the German economy - the largest economy in Europe...

fredgraph 1

...not to mention a major (the major) funding source for DB's massive derivative positions.  

Current news events don't portend a positive outcome for Germany's largest bank either. Bloomberg reports: NordLB Boosts Shipping Provisions Five-Fold, Warns of High Loss

Norddeutsche Landesbank boosted provisions for bad loans nearly fivefold to 1 billion euros ($1.1 billion), as Germany’s biggest shipping lender prepares for its first full-year loss since 2009.

NordLB, controlled by the state of Lower Saxony, posted a loss of 406 million euros in the first half as it battles a prolonged slump in maritime markets, including eight years of crisis in the container segment. That compares with a profit of 290 million euros in the same period last year.

“The shipping crisis, which further intensified in the first half of the year, has necessitated impairments that were higher than planned,” Chief Executive Officer Gunter Dunkel said in a statement. The bank lowered its outlook for the year, now anticipating a “significant” loss. It had projected a “negative result” in the spring.

... NordLB’s pessimistic view highlights risks at other German banks, which hold roughly one-quarter of the about 400 billion euros in global shipping loans. Under pressure to unwind sour legacy maritime assets, banks including HSH Nordbank AG and Commerzbank AG are also trying to shrink their loan books.

 What does this have to do with Deutsche Bank? A lot! Because everybody wants to sell these assets that aren't considered very desirable, and all at the same time, we've made a bad situation worse - precisely when DB can't afford it.DB mass selling bad shiping loans

Then there's the issue of DB's somewhat questionable assumptions and characteristics in its financial reporting. Deutsche Bank addendums are quoted as saying:

"The credit risk on the securities purchased under resale agreements and securities borrowed designated under the fair value option is mitigated by the holding of collateral. The valuation of these instruments takes into account the credit enhancement in the form of the collateral received. As such there is no material movement during the year or cumulatively due to movements in counterparty credit risk on these instruments."

What???!!! So, the value of collateral doesn't move now? On planet Earth, not only does the value of collateral move, it tends to move in the exact same direction as the value of the loan, borrowing or underlying, often at an exaggerated pace in the beginning (it's markets are the first to know of turmoil). Reference my podcast interview with Max Keiser at the 2:40 marker. Want some more? Read this page from our EU banking report a couple of quarters ago...

For those who don't believe me, I made this call in early 2008 - twice. Once for Bear Stearns (Is this the Breaking of the Bear?) and once for Lehman Brothers (Is Lehman really a lemming in disguise? Thursday, February 21st, 2008 | Web chatter on Lehman Brothers Sunday, March 16th, 2008). Was I right? Of course, that was then and this is now, so the banks are better prepared, right? Of course. The graphic below was taken from our Banco Popular report (click here for more info), not from 8 years ago, but from a quarter ago - yes, 2016! Hey, there's more...

Banco Popular Research teaser3

Now, just imagine that Italy's Banco Popular is the entity that DB used to hedge it's exposure, and Banco Popular (obviously) can't pay up on every(any?)thing. DB's gross exposure become's DB's net exposure as DB's notion value and market value converge near instantaneously if (or when) market shoots off in one direction (you can likely guess what direction that would be for stakeholders, and this time around that includes depositors and bondholders, not just shareholders).

What does this all mean?  Well, we went through this in explicit detail and have identified no less than 6 (and we're still actively looking) financial institutions that may have passed the EBA stress tests, but have miserably failed our examination - and that's without adding in the bank contagion factor!

To partake in this knowledge, join Veritaseum University and purchase the interactive research asset called "European Bank Contagion Assessment, Forensic Analysis & Valuation".

I have been warning Veritaseum users about the unbridled risks the ECB is taking with its banking system by slamming its yield curve - driving short and medium term rates negative. Despite the ECB's proclamations, its banking system is still quite fragile, and it is putting pressure on the barely recovered fractures, causing additional stress fissures.

Before we go on, if you haven't read "It's All Out War, Pt 3: Is the Danish Krone Peg to Euro More Fragile Than Glass Beads? The Danish National Bank Infers So! and "How the Danish Central Bank is Destroying the Danish Citizens' Wealth Form Both Sides While Stressing It's Bank!", please do. My warnings in 2010 on the PAN-EUROPEAN SOVEREIGN DEBT CRISIS will do a lot to fill in the background as well.

Yesterday, the Wall Street Journal ran a story on the Spanish bank, Bankinter S.A., which was actually paying customers interest on their mortgages, in a rather backwards twist that is the result of the perverse incentives (basically, the opposite of typical tenets that underlying fundamental analysis) that come about when you turn the world of borrowing, literally, upside down. Here's an excerpt (and remember I warned about Spain 5 years ago in "The Spanish Inquisition is About to Begin..."):

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