Interesting thread.
What I see in DB though FWIW is a price to tangible book at 0.27. The 10 year low is 0.25. It will almost certainly break that. Also a low PE and P/FCF.
From what I can see, cash to debt is around 1.4-1 and it has a negative EV.
If it drops much more, I'm not sure I can avoid buying.
I'm happy to accept it has problems, but those numbers for a bank designated "too big to fail" seem like a rare buying opportunity to me. I like companies under 0.3 PB. To get low P/FCF multiple, and negative EV alongside it is quite rare.
Seems like it was one trade on thier CDS that started a panic (via Bloomberg)
A stylized thing that happened in the financial crisis of 2008 is that big international investment banks funded themselves with a lot of very short-term borrowing (repurchase agreements, overnight loans, derivatives liabilities) from other big market participants (banks, hedge funds, etc.), and their lenders hedged their credit risk using credit default swaps. If you had a lot of derivatives exposure to Bear Stearns & Co., you might buy some CDS on Bear. If everyone got worried about Bear, (1) they would buy a lot of Bear CDS, pushing its price up and (2) they might stop doing business with Bear or lending it money, causing it to fail. There would be a “run on the bank,” not in the literal sense of depositors lining up to take out their money — Bear was not an actual bank and didn’t really have depositors — but in the sense of big short-term lenders declining to roll over their loans and terminating derivatives positions. And the CDS market, as an indicator of how big market participants viewed Bear’s credit, was a warning signal of a potential run. If everyone thinks Bear’s credit is bad, they will not roll their loans.
But that was a long time ago and things are different now. For one thing, Bear and Lehman Brothers and the other independent investment banks are gone; these days the big investment banks are mostly attached to actual banks that have access to their central banks’ lender-of-last-resort facilities. Also those big banks have learned the lessons of 2008 and do not fund themselves with short-term capital-markets borrowing nearly as much as they used to.
Take Deutsche Bank AG, for instance. At the end of 2008,
it reportedassets of about €2.2 trillion with just €32 billion of shareholders’ equity. The rest of its money was borrowed, some in conservative bank-y ways (€396 billion of deposits and €134 billion of long-term debt), but much of it in riskier capital-markets ways (almost €1.4 trillion of “financial liabilities at fair value through profit or loss,” including derivatives liabilities, plus “other short-term borrowings”). At the end of 2022,
it reported assets of about €1.3 trillion and equity of €72 billion, more than doubling its equity while almost halving its assets. Meanwhile much more of its funding comes from deposits (€621 billion, along with €132 billion of long-term debt) and much less comes from short-term capital-markets-y stuff (€388 billion of fair-value liabilities and just €5 billion of other short-term borrowings). Deposits went from about 18% of its funding to about 46%. If there was going to be a run on the bank at Deutsche Bank in 2008, it would have been Deutsche’s derivatives counterparties getting nervous. If there was going to be a run on the bank at Deutsche Bank in 2023, it would have been a regular run on the regular bank, with depositors getting nervous and taking their money out.
Meanwhile the market for single-name credit default swaps is also
much smaller now than it was in 2008, due in part to regulatory nervousness about that market after 2008. So last Friday, some 90 million shares of Deutsche Bank’s stock changed hands in tens of thousands of trades.
[2] Meanwhile there were about 20 cleared trades in Deutsche Bank’s CDS that day, which was a pretty busy day for CDS.
[3]
But 2008 looms large as the template for a big banking crisis, and so in the week before Credit Suisse Group AG was sold to UBS Group AG in a weekend rescue, there were 2008-y stories about
its CDS curve invertingand
derivatives counterparties refusing to deal with it. But Credit Suisse’s derivatives business in 2023 was
a shadow of what it was in 2008, and what actually brought Credit Suisse down was mostly
depositors taking their money out of the bank. A normal bank run, not a fancy 2008-style shadow bank run.
The point here is that “the prices of a bank’s CDS rise, indicating that its counterparties are no longer willing to lend to it” is no longer quite the sign of bank distress that it was in 2008, even if it did correctly predict Credit Suisse’s demise. So
here’s this:
Regulators are singling out a trade on Deutsche Bank AG’s credit default swaps that they suspect fueled a global selloff on Friday.
It was a roughly €5 million ($5.4 million) bet on swaps tied to the German bank’s junior debt, according to people familiar with the matter, who said regulators have spoken to market participants about the transaction. The contracts can be illiquid, so a single bet can trigger big moves. A spokesperson for Deutsche Bank declined to comment.
The suspected knock-on effect was a rout that sent banking stocks tumbling, government bonds higher and CDS prices for lenders soaring, trimming about €1.6 billion off Deutsche Bank’s market cap and more than €30 billion off an index that tracks European banking stocks. That’s because investors have been on edge since the collapse of several US banks and rescue of Credit Suisse Group AG, with the market searching for clues on whether other lenders would also face strain. …
It’s unclear who placed the relevant trades or why they did it. Some data point to the trades being for hedging purposes, said one of the people. There’s also a trade on Deutsche Bank’s five-year, senior CDS contracts executed on Thursday that attracted scrutiny, one of the people said.
One €5 million trade! That’s, like, one managing director hedging her comp for this year.
[4] Similarly:
The European Central Bank’s top supervisor has claimed “opaque” trading in credit default swaps is harming banks’ share prices and could threaten a run on deposits.
Andrea Enria, chair of the ECB supervisory board, called for a review of the market after sharp moves in the prices of CDS preceded a sudden drop in the shares of Deutsche Bank and other European lenders last Friday.
“With a few million you can move the CDS spread of a trillion-euro-asset bank and contaminate of course stock prices and possibly also deposit outflows,” Enria told a conference in Frankfurt. “So that is something that concerned me a lot.” ...
Answering a question about Friday’s share price fall at Deutsche, Enria said the CDS market was “very opaque, very shallow and very illiquid”. … The derivatives are thinly traded — in the final three months of last year there were on average only nine trades per day in Deutsche’s CDS even though it is one of the most traded, according to the US’s Depository Trust and Clearing Corporation, which runs a swaps data repository, although it is unclear how often they were traded this month.
If your pattern-matching is from 2008, “CDS on Deutsche Bank blows out” is a good reason to panic, and the market did. But I am not sure that that pattern-matching works anymore.
