• Alan Brazil

If DB has an Issue, then all large banks have a problem, particularly French ones

Well, after the sell-off the question is should you be buying DB, given it is through the level of 2008? My answer is yes and would be buying across the capital structure. The idea that DB can suffer debt conversions and other systemic issues is not plausible because it would take down just about every bank in Europe, and those in the US as well. Yes, DB has too little equity amongst other issues. However, as I argue in my new trading theme, every large bank in Europe, most notably French ones have the same if not greater issues. However, capital is only one aspect of the larger problem of a business model of leverage that continues to drive European banks from one crisis to the next over the last 10 years. This leverage model began in the early 2000s as domestic loan growth slowed. In the early 2000, large European banks, including DB, used leverage to grow their balance versus deposits and capital by buying lower risk weighted assets (triple-A ABS backed by US mortgages) , including derivatives, and funding the growth with wholesale funding. The problem with this model was first exposed during the 2008 mortgage meltdown. In the aftermath, these banks did not change their model but rather changed the assets from US mortgage backed to credit growth to the GIIPS. Then came the GIIPS crisis. Now these banks are faced with the problem of low ROE, increasing cost of funding, the impact of NIRP on asset yields and availability of low risk weighted assets, regulatory pressure from counterparty risk of derivatives, and of course, the focus on DB. So, yes DB has issues but so do other large European bank. DB is pricing all of those issues and more, but the others are not.

I think the best asystematic trade for this thesis is be to buy DB’s debt, but the liquid trade and more transparent trade that I am recommending is to buy DB equity and sell large French bank equity.


©2018 SOM Macro Strategies LLC : All Rights Reserved