MorningWord 6/17/13: Late on Friday a little headline snuck out from Reuters that I was surprised did not get more play over the weekend, “Deutsche Bank ‘horribly undercapitalized’ – U.S. regulator”. If that headline had hit in June 2011 or 2012, DB shares might have dropped 3% in a quick move, but in 2013, with Draghi in perpetual “do whatever it takes” mode, this sort of sentiment almost seems cute. Reuters quotes Thomas Hoenig, the Vice Chairman of the Federal Deposit Insurance Company (FDIC- guarantor of deposits at U.S. banks) in what the article claims in a personal capacity, not on behalf of the FDIC. Hoeing suggests that Deutsche Bank’s capital levels are “horrible” and said it is the worst on a list of global banks based on one measurement of leverage ratios. Specifically, he suggests that “It’s horrible, I mean they’re horribly undercapitalized,”….. “They have no margin of error.”
It is important to note that not only are regulators remaining dogged on such issues, DB itself sold equity and debt equaling more than $6 billion in an effort to raise capital levels back in late April, and the stock has been rewarded, up ~10% since. DB has outperformed many of its European peers as measured by the EuroStoxx Bank Index (SX7E), chart below, which is up a bout 5% in the same period.
From a purely technical standpoint, I would mention that DB has remained above its 50 and its 200 day moving average since the April 29th announcement of their capital raise, despite what appears to be a lessening of momentum as the stock approaches a key support level dating back to Sept 2012.
On a couple occasions last week I highlighted the SX7E’s apparent relative weakness and clear loss of momentum with its first close below its 50 and 200 day moving averages since April 28th, and a close below 9 month support.
Why is this interesting to me?? Well we have avoided attempting to short any banks since April and believe it or not, our last trade was profitable (put spread in GS, read here), but this is probably the longest period in the last 2 years that we have gone without a trade in the banks either long or short. Late last week I took a little shot on some XLF July puts with the notion that if we get a fraction of the action that we have seen over the last 2 summers, the XLF could be ripe for a little bit of re-tracement and this is a relatively low premium way to get some broad sector exposure in a period that should capture many of the large components Q2 earnings announcements.
The European banking system continues to pose the main sentiment risk to U.S. banking stocks. Earnings are relatively stable, capital markets are strong, and valuations are cheaper than the broader market. But the global banking system remains closely intertwined for the largest stocks. Many more capital raises by DB and other European banks are needed to put banking investors globally on more sound footing.