Chart of the Day – Deutsche Bank (DB): Bitte Pill To Swallow

by Dan May 19, 2014 3:42 pm • Commentary

Last July, Federal Deposit Insurance Corp Vice Chairman Thomas Hoenig referred to Deutsche Bank as “horribly undercapitalized” and that the largest European banks has “no margin of error”.  Since that time the bank has raised billions in new capital, and just last night did a rights offering raising $11 billion selling shares to existing large shareholders and the Qatari royal family.  

The stock’s reaction to such a large raise feels a bit muted, down only 1.5%, as investors may have already priced in the overhang with the stock down 22% from the 2014 and 52 week highs coming into today’s trading day.  As a trader I could not help but notice that if the stock were to have gone down to the prior 52 week low from last July at $40, what a very attractive entry it might have been to play for a reversal on such a big piece of news and the corresponding volume:

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

Whatever the near term benefit is to the higher capital buffer for DB, those with knowledge of the Euro Bailouts of the likes of nations like Ireland and Greece, were essentially to make banks like DB good on their prior lending to the defunct nations.  The bank has put a little lipstick on the pig that is their latest capital raise as they state they will use some of the proceeds to build out fixed income operations, but it appears that most Euro banks are where U.S. banks were in the de-leveraging cycle in maybe 2011.  

Prior to last night’s news the implied vol on DB options was reaching multi-year lows, but today’s news has caused a bit of a spike in options prices:

[caption id="attachment_40665" align="aligncenter" width="600"]DB 4yr chart of 30 day at the money IV from Bloomberg DB 4yr chart of 30 day at the money IV from Bloomberg[/caption]

I guess the main take-away here is that if you were of the mindset that the raise comes at time before a period of uncertainty for Europe’s economic recovery, then options prices could still be quite low, and those looking for protection or to make directional bets might have gotten a little wake-up call from the options market. But for those that think this was just what the doctor ordered and should offer a level of comfort at time when things look to be on the up and up for the long beleaguered region, than short premium strategies could make sense given the recent pop.