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 bail-outs of European banks, the EU implemented a new “bail-in” regime beginning on January 1, 2016. As such, rules which require banks and certain systemically significant market participants in EU member states will have to write-down, cancel, convert into equity or otherwise modify certain unsecured liabilities if such steps are required to recapitalize the institution. What is the most bountiful unsecured liabilities of a bank?
More than 50% of the 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 having higher degree of exposure are in Europe and The USA. And this will impact the financial conditions of their counterparties also.
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?:
There will be some losses and conflict upon resolution of some of these. How do we know? We believe have identified the counterparty of DB and it has booked a 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”, resulted in an overall reduction of risk by 2.3 billion euros from 2014 to 2015. Though 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, .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 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...