Well, don’t say we didn’t warn you on Wednesday.
It was all about Deutsche Bank today as the ADRs crashed to record lows on reports hedge funds are pulling funds from the bank’s prime brokerage. In other words, there’s a run on Deutsche Bank. So for once this...
...didn’t matter. No OPEC deal was going to save stocks from the very same bank run we warned about a little over 24 hours ago.
This all started (as you can clearly see below), at around noon with this via Bloomberg:
Some Deutsche Bank Clients Said to Reduce Collateral on Trades
“A number of funds that clear derivatives trades with Deutsche Bank have withdrawn some excess cash and positions held at the lender, a sign of counterparties’ mounting concerns about doing business with Europe’s largest investment bank.”
“While the vast majority of Deutsche Bank’s more than 200 derivatives-clearing clients have made no changes, some funds that use the bank’s prime brokerage service have moved part of their listed derivatives holdings to other firms this week, according to an internal bank document seen by Bloomberg News.”
“Millennium Partners, Capula and Rokos are among about 10 hedge funds that have cut their exposure, said a person familiar with the situation who declined to be identified talking about confidential client matters.”
“The hedge funds use Deutsche Bank to clear their listed derivatives transactions because they are not members of clearinghouses.”
“Millennium, Capula and Rokos declined to comment when contacted by phone or e-mail
‘Our trading clients are amongst the world’s most sophisticated investors,’ Michael Golden, a spokesman for Deutsche Bank, said in an e-mailed statement.”
“We are confident that the vast majority of them have a full understanding of our stable financial position, the current macroeconomic environment, the litigation process in the U.S. and the progress we are making with our strategy.”
And….. here’s what happened next:
Bloodbath. Plain and simple. And once again, we told you this would happen yesterday. Without saying anything specific we know former employees there. This place is a landmine. They’ve racked some ungodly notional derivatives book and sorry John Cryan, but it’s too late. This ship is sinking. And you owe the DoJ $14 billion dollars.
Even if you negotiate it down by something like 75%, that’s still a big settlement for a firm that lost $7 billion last year.
And we don’t mean to be overly crass here, but give us a break. How long do you (and by “you” we mean John Cryan) think this was going to last? And perhaps more comically (unless you’re a shareholder that is), how do you just tell the US Department of Justice that you aren’t going to pay them? Yes, yes you sure as hell are going to pay them. The only question is how much. Here’s Citi’s Andrew Coombs who isn’t exactly known for mincing words when it comes to Deutsche:
“Deutsche reported an end-June CET1 ratio of 11.2% pro-forma for the HXB stake sale, but still only targets c11% by end-2016 as further litigation charges are assumed, with management expecting to resolve four of the five major outstanding litigation cases this year. We model 10.9%. We struggle to see how Deutsche Bank can reach the fully-loaded SREP requirement of 12.25% in the medium-term. Furthermore the leverage ratio, at 3.4%, looks even worse relative to the 4.5% company target by 2018 and an IPO of Postbank looks increasingly challenging to execute upon. Management should be reluctant to raise capital with the bank trading on only 0.3x P/TB, but the only viable alternative is to further cut balance sheet, which would be even more detrimental to earnings.”
Litigation Risks
“Deutsche Bank currently has €5.5bn of balance sheet litigation provisions, which we estimate is split c€2-3bn relating to RMBS, c€1bn relating to Russia mirror trades and c€1.5-2.5bn other. Consensus assumes a further c€3bn of litigation provisions will be booked over 2H16-2017, slightly above Deutsche Bank’s disclosed contingent litigation liabilities (unprovisioned risks) of €1.7bn. This would seem to imply that consensus expects a total RMBS litigation claim of c€4-6bn, or c$5-7bn, which is well below the $14bn opening position by the DoJ. Deutsche is now set to submit a counter proposal. The FT (16 Sep 2016) has highlighted that Goldman Sachs settled for $5bn vs an initial $15bn claim by the DoJ..”
(Chart: Citi)
“We highlight two feedback loops: one short-term and one long-term. Widening credit spreads can exacerbate market fears, result in negative press coverage and damage counterparty confidence. The February tender offer for senior debt, coupled with a solid funding and liquidity position, has helped to address this loop. However a longer-term feedback loop still exists. Deutsche needs to raise capital in our view. It may choose to wait until litigation issues have been resolved, but the further the share price falls, the more dilutive a capital raise becomes (and vice versa). We have a Neutral / High risk rating.”
That last part is key folks: “...it may choose to wait until litigation issues have been resolved, but the further the share price falls, the more dilutive a capital raise becomes.”
Well guess what? It ain’t got a whole lot further to fall.
Heisenberg doesn’t normally give trading recos. That’s Don’s gig. But let us tell you this: get out of this thing while you still can. Even if it rebounds, it’s like taking a bucket and throwing water out of a leaky boat.
But hey, what do we know right? We only called it yesterday.