$DB – Something Rotten in DeutscheMark?

by Dan July 2, 2013 3:11 pm • Commentary

Yesterday in the MorningWord I highlighted the chart of the Euro Stoxx Bank Index (SX7E), that I dubbed the “worst chart in the Northern Hemisphere” showing the index siting on massive long term support, and if broken could display a fairly textbook head and shoulders top formation.

SX7E 1 year chart as of 7/1/13 from Bloomberg
SX7E 2 year chart as of 7/1/13 from Bloomberg

In that post I referenced one of the index’s largest components, DB, and the commentary from U.S. FDIC Vice Chairman Hoenig (here) regarding the bank’s capital levels:

“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.”

Looking at DB’s one year chart, it is not surprising that it closely resembles the one year formation of the SX7E, but what is also noticeable is that the stock is now below the level where the company raised capital back in April (circled below) that some Euro Bank bulls referred to as a possible ending point to the Euro Sovereign debt crisis.

DB 1 yr chart from Bloomberg
DB 1 yr chart from Bloomberg

A few weeks back in reference to my XLF July Put purchase (here), I wote a post titled, “European Banking System Remains Main Sentiment Risk to U.S. Bank Stocks (here), where I suggested that despite strong performance of U.S. banks, cheap valuations and solid capital levels, “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.”

Just for fun, I’ll throw in the last week and half performance of a large U.S. bank like GS. Since last Monday’s intermediate term bottom in the SPX, GS is up only 1.4%, while the SPX is up double that.

GS 1 yr chart from Bloomberg
GS 1 yr chart from Bloomberg

SO THE OBVIOUS QUESTION as we head into Q2 earnings season is, do disasters await us on bank balances sheets?  Now normally this question would sound rather alarmist, but when you consider the fairly unprecedented price action of commodities, currencies, bonds and then equities in markets like Japan and Brazil (Bovespa making new multi-year lows today down ~4%), it is not unrealistic to think that banks have taken on risks from withering customers and that some banks have gotten nailed in their own right from their own proprietary positioning. Remember just a few weeks ago a research firm suggested that Citi could be looking at a $5 to $7 billion hit from their positioning in dollar/yen.

Despite the recent rally from last weeks lows, I can’t help but think that the relative weakness in large Euro Banks like DB is likely a pre-cursor to a broader move across the pond. If these stocks were to stabalize and bounce at these levels, that’s another story. But if they break, it could signal some larger movements in other names and markets.