Deutsche Bank and Commerzbank will soon be telling us bigger is best

The weekend just gone has seen a surge in speculation about a matter we have been expecting for some time. It is this issue of solving the problem of a bank that is too big to fail by making it even bigger! Why might this be? Well let us go back a little more than two years to February 2nd 2017.

The bank’s net loss narrowed to 1.89 billion euros in the three months through December, from a loss of 2.12 billion euros a year earlier. Analysts had expected a shortfall of 1.32 billion euros.

As I pointed out it was not supposed to be like that as the background for banking was good.

As I look at this there is the simple issue of yet another loss. After all the German economy is doing rather well with economic growth of 1.9% in 2016 and the unemployment rate falling to 5.9% with employment rising. So why can’t Deutsche Bank make any money?

It has continually blamed “legacy issues” but we find if we advance two years and a bit in time that it is still in something of a morass. Actually in terms of those willing to back its future with their money things look much worse as the share price in February 2017 was 16.6 Euros according to my monthly chart as opposed to the 7.85 Euros as I type this. So one option which is a(nother) rights issue faces the problem that to do any good existing shareholders would be diluted substantially.

What is happening?

From Reuters.

Berlin is so worried about the health of Deutsche Bank that it pushed for a merger with rival Commerzbank even though it could open up a huge financial shortfall, a German official told Reuters.

As we wonder how huge is “huge”? Let us remind ourselves that the German public finances are in strong shape. Germany is running a fiscal surplus and has been reducing its national debt in both absolute and relative terms. Indeed as the last relative number of 61% of GDP (Gross Domestic Product) was for the third quarter of last year Germany may now qualify under the Maastricht Treaty rules. So it could borrow more to cover even a “huge” amount and as we stand can do so very cheaply with the ten-year bund yield a mere 0.07%.

I cannot say I have much faith in the explanation for the losses though as the QE bond buying of Mario Draghi and the ECB has created large profits for most European sovereign bondholders.

The German official said that any tie-up would likely result in a multi-billion-euro hole because a switch in bank ownership legally triggers a revaluation of assets such as government bonds.

They would be revalued at a market price which is typically lower than the one registered on the accounts. A second source, who is familiar with the talks, said they also expected a shortfall after the potential merger.

I think we will find it is other assets which will be causing the trouble and the explanation is something of a smokescreen. It also looks like there has been some “mark to fantasy” going on in the accounts which seems most likely to have taken place in illiquid bonds and derivatives.

As we continue our look don’t they mean 2008 (and maybe 2011/12) as well as 2016?

“In 2016 … Deutsche went to the brink,” said the first official. “They haven’t really got out of that hole…It’s legitimate to ask:… how dangerous is that with systematic relevance?”

This contrasts with the official rhetoric.

Deutsche Bank has said it is stable. Last month, as it announced a return to profit in 2018, its chief executive Christian Sewing said it was “on the right track” for growth and lower costs.

It would appear that Herr Sewing is unaware of the meaning of the phrase “the right track” provided by the Greek crisis where it led to people singing along to AC/DC.

I’m on the highway to hell
On the highway to hell
Highway to hell
I’m on the highway to hell.

Also as a reminder the IMF ( International Monetary Fund ) reported this back in the summer of 2016.

Among the G-SIBs, Deutsche Bank appears to be the most important net contributor to systemic risks, followed by HSBC (HSBA.L) and Credit Suisse (CSGN.S)………..The relative importance of Deutsche Bank underscores the importance of risk management, intense supervision of G-SIBs and the close monitoring of their cross-border exposures.

The story of the last decade is that the problems of Deutsche Bank have never really gone away and in fact have got worse when the economy got better. Should the present period of economic weakness continue then the heat will be not only be turned up a notch or two. As to the legality of all this then surely it should be blocked on competition grounds but when “the precious” is involved matters like that seem to disappear in a puff of smoke.

Meanwhile as Johannes Borgen pointed out at the end of last week maybe the ground has been tilled a little.

I have just realised that Germany passed a law to make redundancies easier for high earners. Those fat cat bankers at Deutsche must feel slightly nervous. How bad must the government want this deal, to make a law only to facilitate it…

The economy

This morning has brought more information on the ongoing economic slow down. From Germany Statistics.

 In January 2019, production in industry was down by 0.8% from the previous month on a price, seasonally and calendar adjusted basis and -3.3% on the same month a year earlier.

December was revised higher but in return January saw another fall meaning that the word temporary is being stretched again. As to the cause well here is a brake on things.

Automobile production fell by 9.2 percent on the month in January, separate data from the Economy Ministry showed. ( Reuters)

Also whilst the world economy will welcome a reduction in one of its imbalances the German one will be slowing because of this.

The foreign trade balance showed a surplus of 14.5 billion euros in January 2019. In January 2018, the surplus amounted to 17.2 billion euros.

According to BreakingTheNews this is hitting official forecasts.

Germany’s government lowered its gross domestic product (GDP) projections for the country in 2019 to 0.8%, Handelsblatt reported on Monday, quoting a confidential note sent by the Ministry of Finance.

Comment

This year has seen more than a few zombie banks return to the news like a financial version of hammer house of horror. We have seen Novo Banco ( Portugal) leaching from the state and a row of Italian banks as well as NordLB of Germany. But Deutsche Bank has returned and the situation is in many ways dominated by this from Reuters BreakingViews.

Lastly, how will a combined bank achieve a 10 percent return on its capital? Deutsche made a piddling 0.5 percent return in 2018 and Commerzbank a paltry 3.4 percent.

Putting it simply Deutsche Bank has not only lost its mojo it lacks any real form of business model. Commerzbank has made a little progress but only by escaping the supermassive black hole of investment banking as we note that a merger would bring it back within that area’s event horizon.

Or to put it another way it is hard to keep a straight face when this is presented as a way of helping with the issue of too big to fail

Deutsche Bank’s chairman Paul Achleitner is also an advocate for a merger that would create the eurozone’s second-largest bank with close to €1.9tn in assets. ( Financial Times)

Podcast

 

 

 

 

The NordLB crisis and the problems of the German banks

Today what we are going to be taking the advice of the Jam and Going Underground. Specifically we are looking into the problems and travails of the German banking system. One factor in this is the deteriorating economic situation which the German IFO has kindly elaborated on this morning.

As you can see according to them the German economy has gone from strong boom to slight down swing and is now moving into down swing. That will not be good for the banking environment. Some wry humour can be provided by the comparison with Italy as a 0.1% fall for it put it in “deep recession” in the third quarter of last year but a 0.2% decline for Germany apparently only put it in a “slight down swing”! Also surely the French strong boom was in 2017 rather than last year, but we get the picture that generally there has been not only a slowing but an expectation of harder economic times across the Euro area which will affect international banking.

Landesbanken

The Frankfurt Rundschau looked at things back on the 24th of May last year.

Most of the Landesbanks belong to the federal states and savings banks associations, with the exception of Landesbank Berlin, which is the sole property of the savings banks.

The ownership structure is complicated by they are mainly owned by German states and cities. Also the credit crunch ending up crunching some of them.

Before the financial crisis, there were still eleven central institutes of the savings banks and the central savings bank fund provider Deka in Frankfurt. In the meantime there are only seven – after the privatization of HSH Nordbank six – and the Deka.

Even back then one of them was in particular trouble.

The capital base of Nord LB is rather modest. CEO Thomas Bürkle therefore stated in April that the bank and its owners – the states of Lower Saxony and Saxony-Anhalt as well as three savings banks associations – were examining “various options” in order to get fresh money. This includes the inclusion of a private investor. For if the state owners inject capital, that would be an aid case and would call the European Commission on the plan.

I do not know if they meant outright modest or in comparison to the troubled loan book but we do know the situation was already worrying enough that a road to Damascus style move as in accepting private capital was looking likely.

So we move on with a reminder that whilst there were hopes that ownership structures might influence banking behaviour. But just like the hopes for the mutuals were dashed in the UK the state backed Landesbanken continue to be trouble.

NordLB

The particular case of Nord LB has gone from bad to worse in 2019. On January 3rd the Financial Times reported that a regular establishment gambit had come something of a cropper.

Frankfurt-based public lender Helaba has terminated merger talks with stricken state-owned rival NordLB, reducing the possibility of a public sector rescue of the Hanover-based lender that aims to raise €3.5bn in additional capital………A merger between Helaba and NordLB would have created a lender with about €320bn of assets and could have been a first step towards a wider consolidation of Germany’s Landesbanken — the regional lenders co-owned by federal states and local savings banks.

So as my late father would have put it, that would have muddied the accountancy picture for a couple of years. As to what they would have been trying to cover up and hide?

With €155bn in assets, Hanover-based NordLB is the fourth-largest German Landesbank and was singled out as the weakest link in Germany’s banking system in the European Banking Authority’s stress test in November. Its balance sheet is creaking under €7.3bn in toxic shipping loans.

The reminds us of how we got here which was via some disastrous lending to the shipping sector and also a reminder of the size of NordLB. This is a problem for the local area.

The state of Lower Saxony, which holds a 59 per cent stake in NordLB, is negotiating with three different private equity investors — including Cerberus and Apollo — over minority investments that would also include the state authority putting more money into the bank.

Apparently it is always just about to turn a corner, which is a familiar theme.

“I am confident that we will find a solution in January,” Lower Saxony’s finance minister Reinhold Hilbers said in a statement on Thursday. His initial plan was to fix the issue by the end of 2018.

Oh and whilst we are thinking in terms of groundhog days, the bits which aren’t losing money are always okay.

A person close to the bank stressed that all of NordLB’s units besides shipping finance are profitable,

What has happened now?

As ever big developments often happen at a weekend and the one just passed was one of those. From the Shipping Tribune.

Germany’s NordLB will be bailed out by public-sector savings banks and the state of Lower Saxony at a cost of as much as 3.7 billion euros ($4.2 billion), thwarting a bid by Cerberus Capital Management and Centerbridge Partners for a stake in the struggling lender.

The restructuring package, which Lower Saxony Premier Stephan Weil called “the best of all possible options,” involves as much as 1.2 billion euros from the savings banks group and up to 1.5 billion euros in capital from Lower Saxony. An additional contribution from the state — NordLB’s main shareholder — could add another 1 billion euros.

In this situations “could add” is invariably a done deal as the news is doled out in bite-sized chunks. As to the significance of this Johannes Borgen is on the case on Twitter.

That’s obviously state resources, but is it state aid ?

He sums up the case for it being state aid here.

Arguing for state aid is the fact that they are owned by the Lander, the cities etc. So fully public owned and this has been the case forever. It’s easy to argue that they serve a public policy goal.

But that is awkward for the German and Euro area establishments for this reason.

I honestly don’t know where this will end. But if the Sparkassen end up being consider public entities for state aid rules, it’s an enormous pack of worm because every single loan they grant could be considered state aid!

Thus there will be a large effort to avoid this is in the way that the ECB calls itself a “rules-based organisation” as it indulges in monetary policies which suggest it instead does “Whatever it takes”.

A possible route is to argue that this has taken place on market terms. That is not really true because the state has offered better terms than the two US hedge-fund alternatives but if we return to the Shipping Tribune maybe the effort has already begun.

The deal with the savings banks will, over time, cost the state less than if NordLB had accepted the offer from the private equity companies, said Reinhold Hilbers, the finance minister of Lower Saxony and head of the company’s supervisory board.

That is a familiar political strategy as by the time we catch up with this particular kicked can we my well have forgotten about this statement and its forecasts and anyway Herr Hilbers will probably have moved on. Oh and it is an implicit admittal that it is costing the state more now.

Comment

We see today that there is far more to the current German banking crisis than the decline or Deutsche Bank or to that matter Commerzbank. Also there are more similarities with the troubles in Italy than many would like to admit. But as we observe this from @macroymercados we are left wondering how the NordLB accounts have been approved for the last decade?

– Agreed to sell loans to Cerberus Capital Management, according to a person familiar with the transaction, while the German lender expects a loss of about €2.7b for 2018.

If we move to the states involved then the figures quoted today will be a minimum for their involvement but that may take some time to be revealed as the proposed cash injection will oil the wheels for some time.

As to whether this will turn out to be a bailout or bail-in only time will tell? This looks like a bailout thus breaking the spirit at least of EU banking rules but we will have to see. We could see some wild swings in the price of Nord LB bonds. As to Germany as a whole even if this gets added to the national debt then there is a clear difference with Italy as it has a 0.17% ten-year bond yield and has reduced its gross national debt by around 52 billion Euros over the past year. Real trouble there would need involvement in Deutsche Bank.

 

 

 

The banks continue to be trouble,trouble,trouble

The weekend just past has been full of banking news which has not been good. That is quite an anti achievement when we note that a decade or so ago when the banking crisis hit we were assured by politicians and central bankers that it would never be allowed to happen again and they would fix the problems. Whereas the reality has been represented by this from the Guardian this morning.

Under the new Lloyds Bank “Lend A Hand” deal, a first-time buyer will be able to borrow up to £500,000 for a new home, without putting down a penny of deposit.

Why is this necessary? It is because the establishment have played the same old song of higher house prices and telling people they are better off via wealth effects. Meanwhile the claims of no inflation are contradicted by the increasing inability of first-time buyers to afford housing even with ultra-low mortgage rates to help.

In this instance the mortgage is 100% of the loan for the people taking it out but payments are backed for 3 years by a family member or members.

The Lloyds deal requires that a member of the family – such as parent, grandparent or close relative – helps out. The bank will only grant the 100% mortgage if the family member puts a sum equal to 10% of the value of the property into a Lloyds savings account.

I have looked it up and their liability is limited to the first 3 years.

At the end of the 3 years, you will be able to take out your savings plus interest. That’s as long as the buyer hasn’t missed any payments or their home hasn’t been repossessed.

Frankly if payments are in danger of being missed it may suit the family member to fund them. But unless things go dreadfully wrong after 3 years we have what it a mortgage with only a little equity as not much is repaid in the first 3 years.

But as ever we see something of a round-tripping cycle between the central bank which pushes cheap liquidity to the banks who then pump up the housing market.

Vim Maru, group director of Lloyds Banking Group, which also controls Halifax, said: “We are committed to lending £30bn to first-time buyers by 2020 as part of our pledge to help people and communities across Britain prosper – and ‘Lend a Hand’ is one of the ways we will do this.

Mark Carney’s morning espresso will be tasting especially good today.

China

Let me hand you over to the People’s Bank of China which has issued a Q&A about its new (easing) policy and it starts with something very familiar.

Banks need to have adequate capital to guarantee sustainable financial support for the real economy.

When central banks state that what they in fact mean is the housing sector. For example the Bank of England claimed its Funding for Lending Scheme was for smaller businesses when in fact lending to them fell but mortgage lending picked up as mortgage rates plunged. So let us dig deeper.

The Central Bank Bills Swap (CBS) allows financial institutions holding banks’ perpetual bonds to have more collateral of high quality, improves market liquidity of such bonds, and increases market desire to buy them, thereby encouraging banks to replenish capital via perpetual bond issuance and creating favourable conditions for stepping up financial support for the real economy.

As we do so we see that what are finite organisations (banks) have debt forever which is troubling for starters. We also note that this is a type of debt for equity operation as we mull that there are some quite good reasons for not being keen on bank equity. So debt in this form ( perpetual) qualifies as capital and I believe Tier 1 capital in this case. The next move is that the perpetual bonds can be swapped for central bank bills meaning that the central bank now has the risk and the investor has none in return for a haircut depending on how much collateral is required. Thus we get.

increases market desire to buy them

because if you have worries you just accept the haircut and pass the rest of the risk to the PBOC.  As to improving market liquidity then the Bank of China was quick to back up that point.

Bank of China issued 40 billion yuan perpetual on Friday at a coupon rate of 4.5%, the first bank issuer of perpetualbond in . ( Yuan Talks)

The catch is that these sort of moves create liquidity for a time but later can drain it. That is because if things go wrong you end up with two very different markets which is the real one and the central bank supported one.

So the banks will get more capital and they will use it to raise lending and if history is any guide the “real economy” will be the housing market. This will then be presented as a surprise and we will learn what the Chinese word for counterfactual is.

Deutsche Bank

It is always there isn’t it? Let us start with what looked like some better news which was a 4% rally in the share price to 8.13 Euros on Friday. This looks like an early wire on this from @DeltaOne yesterday.

DEUTSCHE BANK GETS ADDITIONAL INVESTMENT FROM QATAR…….DISCUSSIONS ON QATAR INVESTMENT ARE ADVANCED BUT NO FINAL AGREEMENT TIMING AND SIZE OF INVESTMENT UNCLEAR

As they are already shareholders then this would be a case of doubling up or rather if we look at the price history doubling down. Of course this is not the only plan doing the rounds about DB.

Shareholders in Deutsche Bank have voiced deep concerns about the German lender’s mooted tie-up with domestic rival Commerzbank, saying the move would “paralyse” the country’s largest lender and destroy value for investors. ( Financial News)

Mind you it has been doing a pretty good job of destroying shareholder value all on its own.

Greece

Here we have seen massive sums used to pump up the banks at the cost of the national debt of Greece itself. But according to the IMF at the end of last week more is needed.

Restoring growth-enhancing bank lending will require swift, comprehensive, and well-coordinated actions to help repair balance sheets. Coordinated steps by key stakeholders are needed to support banks’ efforts to achieve a faster reduction of non-performing loans (NPL).

So all the bailouts have been to the tune of “Tantalize Me” by Jimmy the Hoover from back in the day.

Comment

The sad part of all of this is that we are observing yet another lost decade. As so often the hype and indeed hyperbole has not been matched by action. Central banks like to trumpet the improvement in bank capital ratios but if you look at bank share prices then there has been a shortage of investors willing to put their money where the central banks open mouth operations are.

In the case of Deutsche Bank as well as the Chinese and Greek banking systems we see that we are entering yet another phase of the crisis. With the problems recently at Metro Bank in the UK that had its risk model wrong in another “mistake” then the central banks will be on the case this time or maybe not.

This means we have not been processing most model change requests from internal model banks. ( Reserve Bank of New Zealand)

 

Germany and Deutsche Bank both face economic problems

One of the supposed constants of the credit crunch era has been the economic performance of Germany. Earlier this week saw a type of confirmation of past trends as the European Central Bank or ECB updated its capital key, which is calculated on the basis show below.

The shares of the NCBs in the ECB’s capital are weighted according to the share of the respective Member States in the total population and gross domestic product of the European Union (EU), in equal measure.

Few will be surprised to read that in Euro area terms ( other European Union members are ECB shareholders with the Bank of England at 14.33%) the share of Germany has risen for 25.6% to 26.4%. That poses an issue for any future ECB QE especially as the Italian share has declined. But a little food for thought is provided by the fact that the Bank of England share went up proportionately more.

The economic outlook

As the latest monthly economic report from the Bundesbank points out the situation is not starting from its usual strength.

Economic output in Germany dipped slightly in
the third quarter of 2018. According to the
Federal Statistical Office’s flash estimate, real
gross domestic product (GDP) contracted by
0.2% in seasonal and calendar-adjusted terms
as compared to the previous quarter.

That has tended to be swept under the carpet by the media partly because of this sort of analysis.

This decline was mainly caused by a strong temporary
one-off effect in the automotive sector.

Central banks always tell you a decline is temporary until they are forced not too and in this instance we see two bits at this particular cherry as “temporary” finds “one-off” added to it. But the detail begs a question.

Major problems in connection with the introduction
of a new EU-wide standard for measuring exhaust emissions led to significant production
stoppages and a steep drop in motor vehicle
exports.

Fair enough in itself but we know from our past analysis that production boomed ahead of this so we are counting the down but omitting the up. Whereas next we got something I had been suggesting was on the cards.

At the same time, private consumption was temporarily absent as an important force driving the economy.

This reminds me of my analysis from October 12th.

 Regular readers will be aware of the way that money supply growth has been fading in the Euro area over the past year or so, and thus will not be surprised to see official forecasts of a boom if not fading to dust being more sanguine.

The official view blames the automotive sector but if we take the estimate of that below we are left with economic growth of a mere 0.1%.

 IHS Markit estimates that the autos drag on Germany was around -0.3 ppts on GDP in Q3

Apparently that is a boom according to the Bundesbank as its view is that the economy marches on.

Despite these temporary one-off effects, the economic
boom in Germany continues.

Indeed we might permit ourselves a wry smile as the usual consensus that good weather boosts an economy gets dropped like a hot potato.

as well as the exceptionally hot, dry
weather during the summer months.

No ice-creams or suntan oil apparently.

What about now?

The official view is of a powerful rebound this quarter but the Markit PMI survey seems to be struggling to find that.

 If anything, the underlying growth trajectory for the industry remains downward: German manufacturers reported a near stagnation of output in November, the sharpest reduction in total new orders for four years and a fall in exports not seen since mid-2013. Moreover, Czech goods producers, who are sensitive to developments in the autos sector, again commented on major disruption,

If we look wider we see this.

The Composite Output Index slipped to a near four-year low of 52.3 in November, down from 53.4 in October.

Moving to this morning’s official data we were told this.

In October 2018, production in industry was down by 0.5% from the previous month on a price, seasonally and calendar adjusted basis according to provisional data of the Federal Statistical Office (Destatis).

It was 1.6% higher than a year ago on the other side of the coin but Bundesbank hopes of a surge in consumption do not seem to be shared by producers.

The production of consumer goods showed a decrease of 3.2%.

Yesterday’s manufacturing orders posed their own questions.

+0.3% on the previous month (price, seasonally and calendar adjusted)
-2.7% on the same month a year earlier (price and calendar adjusted)

Deutsche Bank

The vultures are circling again and here is how the Wall Street Journal summed it up yesterday.

Deutsche Bank shares were down about 4% in afternoon trading Thursday in Frankfurt, roughly in line with European banks amid broader market declines. Deutsche Bank shares have fallen 51% this year to all-time lows below €8 ($9.08).

As I type this it has failed to benefit much from today’s equity market bounce and is at 7.73 Euros. Perhaps because investors are worried that if it has not done well out of “the economic boom” then prospects during any slow down look decidedly dodgy. Also perhaps buyers are too busy laughing at the unintentional comedy here.

Deutsche Bank on Thursday and last week defended senior executives. Improving compliance and money-laundering controls “has been a real emphasis of current management,” and the bank has made “enormous investments” in fighting financial crime, said Mr. von Moltke, who joined the bank in 2017, in the CNBC interview.

Could it do any worse? The numbers are something of a riposte also to those like Kenneth Rogoff who blame cash and Bitcoin for financial crime.

Deutsche Bank processed an additional €31bn of questionable funds for Danske Bank than previously thought – that takes the total amount of money processed by the German lender for Danske’s tiny Estonian branch to €163bn ( Financial Times).

That compares to the present market value of 16 billion Euros for its shares. That poses more than a few questions for such a large bank and whilst banking sectors in general have been under pressure Deutsche Bank has been especially so. Personally I do not seem how merging it with Commerzbank would improve matters apart from putting a smoke screen over the figures for a year or two. One thing without doubt is that it would make the too big to fail issue even worse.

Comment

If we look at the broad sweep Germany has responded to the Euro area monetary slow down as we would have expected. What is less clear is what happens next? This quarter has not so far show the bounce back you might expect except in one area. The positive area is the labour market where employment is 1.2% higher than a year ago and wages have risen with some estimates around 3%. So the second half of 2018 seems set to be a relatively weak one.

One area which must be an issue is the role of the banks because as they, and Deutsche Bank especially, get weaker how can they support the economy via lending to businesses? At least with the fiscal position strong ( running a surplus) Germany has ammunition for further bailouts.

Moving back to the ECB I did say I would return to the capital key change. It means that under any future QE programme it would buy relatively more German bunds except with its bond yields so low with many negative it does not need it. Also should the slow down persist there is the issue of it being despite monetary policy being so easy.

 

 

The ESM is being made ready to lead the next set of Euro area bailouts

Yesterday saw something of a change in the way that the Euro area would deal with a future crisis. A special purpose vehicle or SPV that was created in response to the post credit crunch crisis is expanding its role. This is the ESM or European Stability Mechanism which was the second effort in this area as the initial effort called the European Financial Stability Fund or EFSF turned out to be anything but that. However that was then and this is now at let me explain the driving force behind all of this which the EFSF highlighted in a press release on the 9th of this month.

The European Financial Stability Facility (EFSF) raised €4 billion today in a new 5-year benchmark bond, completing the EFSF’s funding needs for 2018………..The spread of the 0.20% bond, maturing on 17 January 2024, was fixed at mid swaps minus 13 basis points, for a reoffer yield of 0.258%. The order book was in excess of €5.3 billion.

As you can see it can borrow on extraordinarily cheap terms as it borrows at 0.26% for five years. Back in the day there were questions as to what interest-rate these collective Euro area institutions would be able to borrow at? We now know that they have been able to borrow if not at Germany;s rate ( it was around -0.15% on that day) at what we might consider to be a Germanic rate. Or as Middle of the Road put it.

Chirpy chirpy cheep cheep chirp

In a way it is extraordinary but amidst the turmoil these two vehicles which whilst they still have differences are treated by markets pretty much as they are one have been able to do this. From the 2017 annual report.

The ESM has a strong financial capacity. The EFSF
and the ESM together have disbursed €273 billion in
loans since inception. The ESM has an unused lending
capacity of €380 billion, after taking into account
the maximum possible disbursements to Greece.

As you can see there is still plenty of ammunition in the locker and once the Euro area switched course from punishing nations ( too late for Greece) it allowed it to trumpet things like the one below.

As a result of ESM and EFSF lending terms, our five beneficiary countries saved a total of €16.6 billion in debt service payments in 2017, compared to the assumed market cost of funding. Greece alone saved €12 billion last year, the equivalent of 6.7% of the country’s GDP.

Yet it is in fact a geared SPV which is another of its attractions until of course the day that really matters.

to ensure the preservation of the paid-in capital of €80.4 billion.1 This money was paid in by the 19 euro area countries, and is by far the largest paid-in capital of any IFI.

Okay so what changes are planned?

This was explained on Friday in Les Echos by ESM Chair Klaus Regling.

The ESM will play a more important role in financial crisis management together with the European Commission. At the beginning of the crisis, there was the troika consisting of the Commission, the ECB and the IMF. With the third programme for Greece in 2015, the ESM was added and it became a quartet. In the future, in principle, a tandem composed of the Commission and the ESM will deal with assistance programmes for countries in financial difficulty. The IMF and the ECB will play a less important role than 8 years ago.

The IMF move seems sensible on two counts. Firstly it should never have got itself involved in the Euro area in the first place as it has a balance of payments surplus. Secondly and this is of course interrelated to the first point the Euro area cannot always rely on it having a French managing director. The ECB may be more subtle as we mull whether its (large) balance sheet will be deployed in other roles? As an aside it is hardly a sign of success if you have to keep changing the names.

The banks

As we know “the precious” must always be protected in case anyone tries to throw it into Mount Doom. There are obvious issues in Greece to be dealt with.

Both Piraeus Bank and the National Bank of Greece dropped to all time record lows today. ( h/t @nikoschrysoloras )

Actually Piraeus Bank has dropped another 5% today so he could rinse and repeat his message. It seems that the triumphant last bailout is going the way of the previous triumphant bailout. Also there is my old employer Deutsche Bank which has got near to breaking the 8 Euro barrier today which will help to bring the Germans on board. Adding to the fear about its derivatives book is the allegation that some US $150 billion of the Danske money laundering scandal went through the books of  DB’s US subsidiary. Sometimes this sort of thing gets really mind-boggling as we observe the period when Danske had a bigger market capitalisation than DB partly driven by money laundering that was facilitated by DB. Do I have that right?

Anyway in the future Klaus Regling may well be stepping in. From his interview with Les Echos.

In June, we agreed that the ESM will provide the backstop. Its volume will be the same as the volume of the Single Resolution Fund. This is being built up with bank contributions and it will reach 1% of bank deposits at the end of 2023, in other words €55 to 60 billion. The decision to use this security net in case the resolution fund is insufficient has to be taken very quickly, even if the parliaments of some countries need to be consulted.

They seem to be hurrying along for some reason…..

 This will be in 2024 at the latest and it could be earlier.

Exactly how can the troubled banking sector which in relative terms is not far off as weak as it was when the credit crunch hit pay for all of this?

Italy

Regular readers will be aware that due to their astonishing track record we take careful note of official denials. Well on the 6th of October the ESM wrote to the Editor of Frankfurter Allgemeine Zeitung.

The claim that the ESM is guaranteeing Italy’s state debt is wrong. Italy has never lost access to international financial markets. Therefore, Italy has never had a rescue programme with the ESM or its temporary predecessor institution, the EFSF. For the same reason, the ESM has neither guaranteed Italy’s state debt nor has it granted Italy any emergency loans.

Of course not as Italy would have to do as it is told first and presently there is little or no sign of that. But one day…

Comment

There is a fair bit to consider here and the likely new role of the ESM is at the top. It is convenient for politicians to pass their responsibilities to technocrats as the latter can take the bad news from a country bailout. However whilst it will need to be approved by the 19 Euro area parliaments these things have a powerful tendency to turn out different to the description on the tin. Just look at the Greek bailout for example.

Whereas the banking moves seem more sotto voce in this but as we seem to be in the middle of if not a crisis a phase where we have seen bank share prices tumble we need to be on alert. It is not just the Euro area girding its loins as for example it was only a few short months ago we were noting plans for more capital for the Bank of England. It is quite an indictment of the bank bailout culture that all these years later we seem to be as David Bowie so aptly put it.

Where’s your shame
You’ve left us up to our necks in it
Time may change me
But you can’t trace time

The ongoing saga that is Deutsche Bank rumbles on

As the credit crunch unfolded the story so often found its way to the banking sector and the banks. But as we approach a decade from the collapse of Lehman Brothers I doubt anyone realised the story would still so often be about them. A headliner in this particular category has been my former employer Deutsche Bank. It has turned out to be like the Black Knight in the Monty Python sketch where all troubles are “tis but a scratch” and returns to the fray. If we look back it was not explicitly bailed out by Germany although of course there were a range of measures which implicitly helped it. For example the government programme to help interbank lending and the interest-rate cuts and liquidity supply programmes of the European Central Bank ( ECB). Come to think of it we would not have expected the ECB to still be pursuing monetary easing a decade later either. Both sagas are entertwined and indeed incestuous.

As in so many cases Deutsche Bank was able to avail itself of the US bank support structure as Wall Street Parade points out.

According to the Government Accountability Office (GAO), Deutsche Bank received cumulative loans totaling $77 billion under the Federal Reserve’s Primary Dealer Credit Facility (PDCF) and $277 billion in cumulative loans under the Term Securities Lending Facility (TSLF) for a total of $354 billion.

That now seems even more significant as we have had several periods where European and Japanese banks have been singing along with Aloe Blacc.

I need a dollar, dollar, a dollar that’s what I need (Hey Hey),
Well I need a dollar, dollar, a dollar that’s what I need (Hey Hey),
Said I need a dollar, dollar, a dollar that’s what I need,
And if I share with you my story, Will you share your dollar with me?

This is in addition to the gains at the time which were liquidity and US $354 billion is quite a lot of it even in these inflated times and a type of bailout from a below market interest-rate.

On the other side of the ledger Deutsche Bank has provided support to various taxpayers around the world via the fines it has paid as a type of compensation for its many miss-selling scandals. The initial claims that these were a few rotten apples turned out to be an organisation that was rotten to the core. According to FN London it has paid around US $8 billion in fines and agreed to compensate US consumers with US $4.1 billion. So has in a sense made some recompense for the liquidity received in the US although some of the Li(e)bor fines were received by the UK.

Share Price

This is a signal of trouble again as we see that this week it has spent some time below 10 Euros again.This is significant on several levels. It was considered a sign of trouble in the autumn of 2016 when Deutsche Bank was hitting the headlines for all the wrong reasons. It also pales considerably when we look back as I note this from back in February 2009 from The Guardian.

Deutsche cut the dividend from €4.50

Back at the peak the share price was more like 94 Euros according to my monthly chart. From a shareholder point of view there has also been the pain of various rights issues to bolster the financial position. These tell their own story as the sale of 359.8 million shares raised 8.5 billion Euros  in 2014 whereas three years later the sale of 687.5 million was required to raise 8 billion Euros. The price was in the former 22.5 Euros and in the latter 11.65 Euros.

Putting it another way shareholders stumped up 16.5 billion Euros in these two issues more than doubling the number of shares to 2.066.8 million for the company to now be valued at around 21 billion Euros at the current share price. As ever a marginal price may not be a good guide but in this instance I suspect the total price would be less and not more as after all if you wanted to buy the bank it should be relatively easy.

To my mind this is made an even bigger factor by the way that the current situation is so bank friendly. Monetary policy in the Euro area remains very expansionary and we have just seen a phase described as a Euroboom. If we return to Germany’s home base we see an economy that since 2014 has grown by around 2% per annum and according to the German Bundesbank house price index (127 cities) prices rose by 9% in 2016 and 9.1% in 2017, meaning the asset base of the mortgage book has strengthened considerably. Yet in spite of all this good news the share price not only fails to recover it has headed back to the doldrums.

Fixing a hole?

The Financial Times reported this on Tuesday.

To many observers in Frankfurt a tie-up between Deutsche Bank and Commerzbank is not seen as a question of if, but when.  The prevailing view among the banking cognoscenti in Germany’s financial capital is that the country’s two largest listed lenders are very likely to merge eventually.

Eventually?

There are two scenarios that could accelerate the potential merger. One is that Deutsche realises that it is unable to turn itself round under its own steam; the other is that a foreign peer tables a bid for Commerzbank, forcing Deutsche’s chief executive Christian Sewing to make a counter offer.

Forcing? I did enjoy the reference to Deutsche turning itself around under its own steam! How’s that going after a decade? As to the second sentence below it is hard not to laugh.

Assuming a 35 per cent premium on Commerzbank’s current market capitalisation, Deutsche would have to pay €14bn for its smaller rival. “There are different ways to structure this deal but it surely would not be in cash,” said a Frankfurt-based investment banker.

If Deutsche had access to €14 billion in cash it wouldn’t need to buy Commerbank.

Comment

There is quite a bit to consider here as we see that in spite of an economic environment that is very bank friendly Deutsche Bank never seems to actually recover. More money has been taken from shareholders who must be worried about the next downturn especially as the issue below has continued to fester. From Reuters in June 2016.

“Among the G-SIBs, Deutsche Bank appears to be the most important net contributor to systemic risks, followed by HSBC  and Credit Suisse ,” the fund said…….“The relative importance of Deutsche Bank underscores the importance of risk management, intense supervision of G-SIBs and the close monitoring of their cross-border exposures,” the IMF said, adding it was also important to quickly put in place measures for winding down troubled banks.

This is a reminder of the worries about its derivatives book and its global links. It was hard not to think of that yesterday as rumours spread about Germany offering financial aid to Turkey.

As to the proposed merger with Commerzbank has everybody suddenly forgotten the problems of Too Big To Fail or TBTF banks?

With €1900bn in total assets, a merged Deutsche-Commerzbank would be the third-largest European bank after HSBC and BNP Paribas.  ( FT)

Oh and as to the question posed by etfmaven in the comments the experience in the credit crunch era is a pretty resounding no.

Do two lousy banks make one good one?

Shareholders of Commerzbank may also acquire a liking for the Pet Shop Boys.

What have I, what have I, what have I done to deserve this?
What have I, what have I, what have I done to deserve this?

 

The ongoing problem that is Deutsche Bank

Yesterday saw what might be called an old friend return to the fore. Back in the day I worked at Deutsche Bank or more specifically for Morgan Grenfell which it purchased. Also we have had reason to follow the story of it on here due to several factors. Firstly it is not only intrinsically linked to the German economy it is of course involved all over the Euro area economy as well as being a global bank. But also because it not only was hurt by the impact of the credit crunch and then of course by the Euro area crisis but a decade or so later from the former it has never really shaken off the view that things went very wrong. You could call it a balance sheet problem or a derivatives based one or a combination of both. Perhaps it is better to put it under the label of trust as in lack of.

Or to put it another way we have seen a form of official denial this morning and we know what to do with them! From Reuters.

“At group level, our financial strength is beyond doubt,” new CEO Christian Sewing said in a letter to staff, candidly admitting that the news flow around the bank was “not good”.

We of course know what to think when somebody tells us something is beyond doubt and if we did not this from the Financial Times helps us out.

My dear colleagues, the last few years were tough. Many of you are sick and tired of bad news. That’s exactly how I feel. But there’s no reason for us to be discouraged. Yes, our share price is at a historic low. But we’ll prove that we have earned a better valuation on the financial markets. We’ve achieved a lot we can be proud of. Now we need to look forward.

It would seem that those backing things with their money are not entirely clear about the “beyond doubt” financial strength as a share price at a historic low tends to indicate exactly the reverse. Also share prices are supposed to look forwards.

Number Crunching

This morning the relief around the actual formation of an Italian government plus no doubt some rallying of the fund management troops has seen the share price rise to 9.5 Euros. But this only corrects around half of yesterday’s 7% fall which saw it bottom at 9.06 Euros and close at 9.18. This compares rather badly with the 15.88 Euros at which it closed 2017 especially as we are supposed to be in a Euro boom. Compared to a year ago the share price is some 42% lower and those of a nervous disposition might do well to look away from the over 94 Euros of early 2007.

The price was lower back in the autumn of 2016 as we mull what “historic low” means? But banks are supposed to do well in the good times and yet Deutsche seems back in the mire. Or to put it another way Welt are pointing out that it was once the same size in terms of market capitalisation as JP Morgan whereas it has now fallen to one- sixteenth of it.

Across the pond

The Wall Street Journal has pointed out this.

The Federal Reserve has designated Deutsche Bank AG’s sprawling U.S. business as being in a “troubled condition,” a rare censure for a major financial institution that has contributed to constraints on its operations, according to people familiar with the matter.

It went on to explain what this meant.

The Fed’s downgrade, which took place about a year ago, is secret and hadn’t previously been made public. The “troubled condition” status—one of the lowest designations employed by the Fed—has influenced th bank’s moves to reduce risk-taking in areas including trading and lending to customers.

It also means the bank has had to clear decisions about hiring and firing senior U.S. managers with Fed overseers. Even reassigning job duties and making severance payments for certain employees require Fed approval, the people said.

In one respect this is a welcome move in that it is a regulator acting although we also need to note that the US Fed seems much more enthusiastic about such moves for foreign banks. After all at home it has just announced plans to ease the Volcker Rule.

The issue for Deutsche Bank is that this development calls into question its plans for the US. Is it even in charge of its operations and did it or the US Fed drive the announced changes?

In many ways this is one of the most damning things you can say about a bank.

The Fed also reupped its criticism of Deutsche Bank’s financial documentation. Examiners expressed frustration at what they described as the bank’s inability to calculate, at the end of any given day, its exposures to what banks and other clients it had in specific jurisdictions, and over what duration, some of the people said.

Standard and Poors

We have learnt over time that the ratings agencies are like the cavalry which arrived the day after the battle of Little Big Horn. But sometimes they do add a little value.

June 1, 2018–S&P Global Ratings today lowered its
long-term issuer credit ratings (ICR) on Deutsche Bank AG and its core
subsidiaries to ‘BBB+’ from ‘A-‘. The outlook is stable.

So stable that they are downgrading it? Anyway we get some detail as to why this has happened.

The lowering of our long-term issuer credit rating reflects that Deutsche
Bank’s updated strategy envisages a deeper restructuring of the business model
than we previously expected, with associated non-negligible execution risks……the bank
appears set for a period of sustained underperformance compared with peers,
many of whom have now finished restructuring.

Or to put it more bluntly you are in pretty poor shape if you are behind the sorry crew listed below.

By contrast, key peers such as
Barclays, Commerzbank, Credit Suisse, and the Royal Bank of Scotland (RBS)
have now worked through their restructuring and business model optimization
and are already starting to see improved performance.

Comment

The fundamental problem here in my opinion is the view held by many within it that Germany will always have at least two banks of which Deutsche Bank will be one. Even in the protected world of banking that is an extreme position. Combined with the credit crunch and then the Euro area crisis this means that it is time for the Cranberries.

Zombie, zombie, zombie, ei, ei
What’s in your head?
In your head
Zombie, zombie, zombie

It seems to have little clear purpose other than its own survival as it struggles from one crisis to the next. So far it emerges from each of them weaker than before but the official view mimics the “Tis but a scratch” of the Black Knight.

I note some reporting that the ECB says the turnaround is going well whereas I also note that things seem not so hot in a land down under.

Australia is preparing criminal cartel charges against the country’s third-biggest bank and underwriters Deutsche Bank and Citigroup over a $2.3 billion share issue, in an unprecedented move with potential implications for global capital markets. ( Reuters)

It’s a mistake……

These days even higher house prices do not seem to be enough. From its own research in January.

During the current real-estate cycle, i.e., from 2009 to 2017, house prices have risen 80% in large metropolitan areas (A cities) and c. 60% in B and C cities….The tight market situation has pushed house prices up even more strongly in
2017 than in the preceding years. According to bulwiengesa (which covers 126 cities), house prices rose c. 6 ½% and apartment prices more than 10% on average.