DB - Deutsche Bank AG

[nickenumbers]

I purchased some Leap options on it going out 18 months at $13 Strike.  It is currently trading around $11.  It is an Event driven strategy.

 

I believe that the intrinsic value is around $16 per share, and Mr. Market is in depressive panic mode, so I am happy to purchase from him.  I think he has pissed his pants on this one.

 

Some thoughts regarding this stock is that the spill over from Italy is depressing it.  And, Italy always has political and financial issues..  Nothing new there, just the panic of the week.  Italy will figure it out.  And then in 2 more years it will happen all over again...  Rinse, repeat.

 

DB is a household name in the EU, there is 0 chance, ZERO chance that the regulators let it fail, in fact I bet they are presently working out a way to turn the page on the DB drama, shore up consumer and investor confidence and move on.  This is the last thing that the EU needs right now is another banking panic.

 

DB knows what they are doing, yes they have made some bad decisions and they have had some bad years, but lets not pretend like they are a band of children that decide to start a banking kiosk on a corner.  No, they are intelligent, sophisticated people that are working to right their ship.

 

And finally, Margin of Safety..  The price is so low, I don't have to be precisely right in order to make a good return.

 

Lets see what happens..

 

PS- Mr. Market needs to change his pee pants on this one.

 

 

[Spekulatius]

DB is not going bankrupt, it would be rescued by the ECB and/or German government for sure. What I am not sure of is how the shareholders would be doing in that case. the Greek banks didn’t go bankrupt either,  but shareholders didn’t make out well.

[rb]

There is little appetite in Germany for an American style bailout for a giant bank. If the state has to come in to prop up DB the shareholders will not be happy at all.

[John Hjorth]

nicke,

 

What was the price for the leaps? Perhaps a fairly small position for you, I suppose?

[Contra123]

I second the Q about the LEAPs.

Maybe I simply don’t understand options very well, but buying LEAPs does not strike me as a superior investment strategy.  Don’t know what IV you paid, but if you really have that kind of time horizon, why not just go long some stock.

 

P.S. IMO EU “not letting DB fail” does not automatically preclude DBs common losing some value.

[walt373]

I like the leaps idea. Those options don't look very expensive. If DB in kind of a binary situation and you're either going to make or lose 100%, then the options can skew that ratio in your favor from 1:1 to 1:3 or more. Seems very likely we find out by 2020. Now, just not sure whether I like the calls or puts more. Or maybe a straddle?

[TwoCitiesCapital]

I second the Q about the LEAPs.

Maybe I simply don’t understand options very well, but buying LEAPs does not strike me as a superior investment strategy.  Don’t know what IV you paid, but if you really have that kind of time horizon, why not just go long some stock.

 

P.S. IMO EU “not letting DB fail” does not automatically preclude DBs common losing some value.

 

LEAPS can be cheap sources of non-recourse leverage to get 2-3x multiplier on the returns while still limiting the downside you'd have if you purchased the same amount of stock.

 

Also, in retirement accounts in the U.S., it's really one of the few forms of leverage you can get.

[nickenumbers]

Walt373 and TwoCitiesCapital answered better than I would have on my own.  Excellent, and well put.

 

My price was about $1.4 per contract.  So lets say that I purchased 10 contracts until 1/2020, 595 days.  DB share price is say $11.10.

 

The quick math is $1.4 x 10 contracts x 100 shares = $1,400 cost to me.  And that is my downside limit.  I can lose no more than that.

 

My thesis is that the stock is beat down and it will go up some time in the future, but I don't know when.  Perhaps in a month, or in 4 months, or is 8 months..  And, because I don't know when, I purchased myself almost 20 months of time with the LEAP.  I think that the stock will find its way back up to $15.5 or $16.

 

If that happens then the approximate value of the leap will be about $3.5, and the investment will be worth $3,500.  A $2,100 profit and 150% unannual return.

 

If I purchased $1400 of stock at $11.40 per share = 123 shares.  If it increases to $15.5 = $1,907 value  $507 profit and 36% unannual return.

 

So, LEAP does leverage your return up significantly.  The LEAP controls more shares.  There are merits to both LEAP and long Stock.

 

For me, I only use Leaps when I feel like I have a good margin of safety, understanding of the timeline thesis, and a very small portion of the portfolio.  They are tools to sweeten the return for me.  Squeeze out a little more alpha.

 

Risk-  If it takes longer than you expect, your Option investment goes to zero when the clock strikes midnight on the option expiration.  And your money goes Tango Uniform, Tummy Side Up, Deader than Disco  COBF Fans..

[Contra123]

Great, thanks for this detail. Very interesting.

[scorpioncapital]

I would sell puts considerably below today's price for a time frame up to a year. I can't imagine something more conservative, except perhaps not getting involved  or going some secured bonds.

[Peregrino]

Didn't see a thread for DB, perhaps for good reason :-\ (although Cerberus seems to find the shares worth picking up).

 

Read this article recently, and I feel like it's incredibly lacking in specificity. 

 

https://www.wsj.com/articles/deutsche-bank-lost-1-6-billion-on-a-bond-bet-11550691086

 

Namely, how is it possible to lose money on muni bonds that were insured by Berkshire Hathaway?  Presumably the bonds didn't default or they would have collected on the insurance.  And the folks around here would seem to agree that Berkshire is good for it if the bonds were to sour.

 

So why mark the bonds down at all?  Is there some weird accounting rule that forced their hand, and if so, were these losses all paper losses not cash losses?

[Guest Schwab711]

Here's a thread on this topic.

 

[Peregrino]

Thanks Schwab, glad I wasn't the only one perplexed and that some of the best still seem to be scratching their heads!

[Spekulatius]

Didn't see a thread for DB, perhaps for good reason :-\ (although Cerberus seems to find the shares worth picking up).

 

Read this article recently, and I feel like it's incredibly lacking in specificity. 

 

https://www.wsj.com/articles/deutsche-bank-lost-1-6-billion-on-a-bond-bet-11550691086

 

Namely, how is it possible to lose money on muni bonds that were insured by Berkshire Hathaway?  Presumably the bonds didn't default or they would have collected on the insurance.  And the folks around here would seem to agree that Berkshire is good for it if the bonds were to sour.

 

So why mark the bonds down at all?  Is there some weird accounting rule that forced their hand, and if so, were these losses all paper losses not cash losses?

 

My guess is that the losses are due to Puerto Ricon bonds, which became an issue way after the financial crisis and seem to be coincidental with the mounting trading losses from 2012-2016. While I am not sure what exactly was insured it might be that some impaired bonds never defaulted as they were restructured. We can’t tell, because we don’t know exactly what BRK insured or the fine print of their protection (which I think was possibly secondary to the monoline insurers “first line” protection on these bonds.

[meiroy]

"That summer (2016), the bank finally dumped the position. On its second-quarter earnings call that July, Mr. Cryan referred obliquely to the transaction. “In early July, we successfully unwound a particularly long-dated and complicated structured trade, which was the largest single legacy trade” in the noncore unit, he said. He didn’t specify the amount of the loss.

 

Mr. Cryan didn’t respond to requests for comment.

 

That August, Berkshire Hathaway said it had paid $195 million to get out of its obligations of an eight-year-old credit-default contract tied to a portfolio of 500 municipal bonds. It didn’t name its trading partner.

 

At the end of 2016, Deutsche Bank closed down its noncore unit. In early 2017, it tapped the equity market again, raising $9 billion.

 

Later that year, it opened an internal investigation into whether it had misled investors or needed to address problems with how it valued certain complex positions.

 

In April 2018, Deutsche Bank’s supervisory board fired Mr. Cryan, replacing him as CEO with longtime executive Christian Sewing.

 

Senior Deutsche Bank executives continued debating as recently as mid-2018 whether to restate past financial results tied to the municipal-bond trade, according to people briefed on the review. They decided not to, and the internal investigation closed.

 

The bank never publicly disclosed the exact trade or the scope of its losses."

[lnofeisone]

I second the Q about the LEAPs.

Maybe I simply don’t understand options very well, but buying LEAPs does not strike me as a superior investment strategy.  Don’t know what IV you paid, but if you really have that kind of time horizon, why not just go long some stock.

 

P.S. IMO EU “not letting DB fail” does not automatically preclude DBs common losing some value.

 

Kind of late to answer this question but you can buy lower strike (let's say 12 call) and sell higher strike (let's say 15) to defray the cost of IV. Both are out of the money so IV. Since both LEAPs would be same time frame, time is not an issue and you are basically betting on price. I bought some 12/15 calls today at 0.55 going out all the way to 2021.

[schin]

Has anyone taken a second look at this?

 

I've been following it for the past year and there has been a lot of bad news priced in, but I cannot fathom a world where DB is not around. From a valuation perspective, I find it is cheap. I know everyone is harping about its ROE being above 10% and their need for growing the top line.... but, I think that's the wrong way to look at this.

 

But, here is my back of the envelope reading of this. Its revenue is essentially flat for 2019 - @ $24-25B. They said they are on target for total costs of $21.5-22B. Simple math for worst case is $24B (revenue)-22B (costs) = $2B in profit. At Equity of $55-60B, that's not a great return on equity (4% instead of the market's desire for 10%).  But, at the market cap is 18B, $2B returned off of $18 B market cap is not too shabby.

 

Even if you price in no growth for the next 3 years as they continue to deleverage, it's not a bad investment at these prices or even double these prices.

 

It doesn't deserve a premium to tangible book value, but 70% discount of TBV looks pretty steep.

 

From the sub of the parts analysis, you have DWS (their asset management arm), CIB (Commerical/IB banking), Retail banking for 17B. DWS was stubbed out last year and its market cap is roughly 9B. UBS is looking into merging to get economics of scale for the Blackrocks out there.  So, you have 9B+ from DWS, which leaves 8B (17 - 9B) for the remaining CIB/Retail bank.... Their prior CEO, John Cryan, had a 9B offering to get their capital up. They said and is noted that all 9B has not been touched.... So, between DWS and the cash, you have 18B in assets without including the CIB (which you can runoff for all I care) and retail bank network that can be sold to anyone (even Commerzbank)... both are priced for free.

 

Again, I'm trying to look at this from a Marty Whitman point of view and I am not seeing the rationale for this major discount. Thoughts?

[Guest Schwab711]

I don't see how they earn their cost of capital or even a meaningful return any time soon. I don't think current BV is a good gauge of what future returns might be given the structural challenges in the EU right now. Maybe it works out but it seems like if near-term projections are realized, then at DB's current price, its valuation would be similar to BNP or SAN. Rates are just too low and DB is too important to Germany to reduce lending domestically.

[Castanza]

Personally I would like to know what Commerzbank saw that made them back out of the deal. Paul Achleitner is holding firm to his conviction that their current path is the correct one. But when someone else pulls out of a deal based on those efforts it makes you wonder if they are on the right path or not?

[TwoCitiesCapital]

Has anyone taken a second look at this?

 

I've been following it for the past year and there has been a lot of bad news priced in, but I cannot fathom a world where DB is not around. From a valuation perspective, I find it is cheap. I know everyone is harping about its ROE being above 10% and their need for growing the top line.... but, I think that's the wrong way to look at this.

 

But, here is my back of the envelope reading of this. Its revenue is essentially flat for 2019 - @ $24-25B. They said they are on target for total costs of $21.5-22B. Simple math for worst case is $24B (revenue)-22B (costs) = $2B in profit. At Equity of $55-60B, that's not a great return on equity (4% instead of the market's desire for 10%).  But, at the market cap is 18B, $2B returned off of $18 B market cap is not too shabby.

 

Even if you price in no growth for the next 3 years as they continue to deleverage, it's not a bad investment at these prices or even double these prices.

 

It doesn't deserve a premium to tangible book value, but 70% discount of TBV looks pretty steep.

 

From the sub of the parts analysis, you have DWS (their asset management arm), CIB (Commerical/IB banking), Retail banking for 17B. DWS was stubbed out last year and its market cap is roughly 9B. UBS is looking into merging to get economics of scale for the Blackrocks out there.  So, you have 9B+ from DWS, which leaves 8B (17 - 9B) for the remaining CIB/Retail bank.... Their prior CEO, John Cryan, had a 9B offering to get their capital up. They said and is noted that all 9B has not been touched.... So, between DWS and the cash, you have 18B in assets without including the CIB (which you can runoff for all I care) and retail bank network that can be sold to anyone (even Commerzbank)... both are priced for free.

 

Again, I'm trying to look at this from a Marty Whitman point of view and I am not seeing the rationale for this major discount. Thoughts?

 

I've dipped my toe in primarily because of the value. Agree that it's hard for me to see a path forward for dramatic improvement, but the price is extremely cheap for bank with the scale they have if they can simply get their house in order.

 

That being said, I've been extremely over-optimistic about European banks before (Santander and Eurobank) and trying to recognize prior mistakes. This will remain a speculative toe-hold position for me because of those prior experiences.

[SharperDingaan]

Personally I would like to know what Commerzbank saw that made them back out of the deal. Paul Achleitner is holding firm to his conviction that their current path is the correct one. But when someone else pulls out of a deal based on those efforts it makes you wonder if they are on the right path or not?

 

It was probably a 'shotgun' marriage, with the Bundesbank holding the 'shotgun'. Commerzbank may also not have been able to make the case to their boards/shareholders, re the jobs loss, and potential dilution as part of the 'merger'. Hard to swallow if you're the 'saviour' - and it's primarily your employees that would get laid off re duplication.

 

Also hard to see DB being allowed to fail. Much more likely the Bundesbank swaps the sh1te out of DB, and spreads it over the rest of the industry in some proportionate fashion. Net reduction for DB, and partial absorbtion by Commerzbank. The industry keeps the jobs, day-to-day banking remains unaffected, and life goes on.

 

SD

 

 

[schin]

I don't see how they earn their cost of capital or even a meaningful return any time soon. I don't think current BV is a good gauge of what future returns might be given the structural challenges in the EU right now. Maybe it works out but it seems like if near-term projections are realized, then at DB's current price, its valuation would be similar to BNP or SAN. Rates are just too low and DB is too important to Germany to reduce lending domestically.

 

If DB can get to the valuation of BNP or SAN, it would be a double or triple.  There are structural issues with EU rates. That's a major buzzkill for all EU banks. But, it cannot stay negative for long.  There are greenshoots of Italian/Spanish NPL being runoff... Once those larger countries are back to par, I think the EU can get back to a normalized rate structure. But, again, those rates are hurting everyone (HSBC, BNP, SocGen) not just DB.

 

It is also unfortunate that the IB in Europe has dried up. But, when it comes back online, BNP and Barclays' earnings will perk up too.. and so to, DB. But, everyone is looks at this worst case/frost lasting forever.

 

But, based upon their cost projects of 21.5B... and revenue above that is gravy. I wish they would go into run-off and just give shareholders their $25 Euros and call it a day.. but, it's too big to fail... and that might be a good thing.

[schin]

Personally I would like to know what Commerzbank saw that made them back out of the deal. Paul Achleitner is holding firm to his conviction that their current path is the correct one. But when someone else pulls out of a deal based on those efforts it makes you wonder if they are on the right path or not?

 

They saw a better offer from Unicredit and ING probably.  By definition a merger with Commerzbank and DB, would cause a lot of closed branches and people. If you look at the DB employee numbers, most of the layoffs has been in the US and in the IB side. There has not been an opportunity to streamline their german base. 

 

They really need to offload their bloated employee structure, it is similar to the GM where the union kills the company.... If Olaf was giving them an opportunity, it would be great for both Commerzbank and DB.  Most Commerzbank branches are literally across the street as a DB branch, so just streamlining the branch network like the US is a huge plus.... It's definitely bad PR, but it's economically the right strategy to pursue.

 

For Paul A., I am not a big fan of him... and he is way overpaid.. but, essentially, their current strategy is not wrong... streamline costs at $21.5 steadystate.... keep revenue at 24B and hope for EU rates and IB markets in Europe to come back online.... Once they do, the revenue will go up and straight to the bottom line....

 

It's pretty simple, but it requires patience. Without replacing their human capital with IT, they will always have a bloated cost structure.. But, give me costs static at $21.5B and revenues of 24B -26B... and I'll take the 2B-3B each year, every year.... it doesn't have to be great.. it just has to be par.

[schin]

It was probably a 'shotgun' marriage, with the Bundesbank holding the 'shotgun'. Commerzbank may also not have been able to make the case to their boards/shareholders, re the jobs loss, and potential dilution as part of the 'merger'. Hard to swallow if you're the 'saviour' - and it's primarily your employees that would get laid off re duplication.

 

Also hard to see DB being allowed to fail. Much more likely the Bundesbank swaps the sh1te out of DB, and spreads it over the rest of the industry in some proportionate fashion. Net reduction for DB, and partial absorbtion by Commerzbank. The industry keeps the jobs, day-to-day banking remains unaffected, and life goes on.

 

SD

 

Upvote!  :D

[Guest Schwab711]

I don't see how they earn their cost of capital or even a meaningful return any time soon. I don't think current BV is a good gauge of what future returns might be given the structural challenges in the EU right now. Maybe it works out but it seems like if near-term projections are realized, then at DB's current price, its valuation would be similar to BNP or SAN. Rates are just too low and DB is too important to Germany to reduce lending domestically.

 

If DB can get to the valuation of BNP or SAN, it would be a double or triple. 

 

You are thinking BV and I'm arguing that DB is situated such that it can only be a going concern and that it will not generate meaningful returns. Normally, BV is useful for large underperforming banks to guess future earnings (since they are also going concern only). For those reasons, I don't think BV is representative of value for DB.