SocGen Sees Deutsche Bank, Banco Popolare And Commerzbank As "Near Fails" Under Adverse Stress Test Scenario

Tyler Durden's picture

This is not what Europe needed to hear with just hours until the official Stress Test release: while everyone expects the 26 reject banks already listed by Moody's previously to fail (and their "passing" will only further discredit the stress test), nobody had dared to utter a peep about the true shaky behemoths at the heart of Europe's banking system, chief among which is Deutsche Bank. Until today. SocGen analyst Hank Calenti just told the firm's clients in a note that not only Deutsche Bank, but also Commerzbank and Banco Popolare may be "near fails" under the adverse (we assume one exists) Stress Test scenario. To wit: "Deutsche Bank may fall into the ‘near-fail’ zone under the adverse scenario, due to the full application of CRD III in the stress test results. As noted by our equity colleagues in their publication of 19 May 2011, Will the upcoming EBA bank stress test trigger further capital raising?, Banco Popolare and Commerzbank may also be ‘near fails’." He continues: "We do not believe that the possibility of Deutsche Bank as a ‘near fail’ is currently priced in the CDS markets." Guess what that means: "We recommend buying subordinated CDS protection on Deutsche Bank and we recommend selling subordinated CDS protection on HSBC as a means to hedge against - and possibly capitalise on - the results of the EU bank stress tests." Well, there is still 100 minutes in which to put the trade on.


DB reported a Basel 2 Core Tier 1 ratio of 9.6%, as of 31 March 2011. Adding €93bn of market risk-weighted assets, as per the Basel 2.5 requirement, results in a reduction of approximately 210bps to their Core Tier 1 ratio (Basel 2.5 is incorporated in  the CRD III requirements). Further adjusting for a possible 100 to 150bps impact of the adverse stress test and DB may move into the near-fail territory. As such, we recommend buying subordinated CDS protection on Deutsche Bank and we recommend selling subordinated CDS protection on HSBC as a means to hedge against, and possibly capitalise on, the results of the EU bank stress tests.

DB begins this test from a relatively low capitalisation level and, as such, may only just pass these tests. HSBC approaches these tests from the opposite condition. At the same time, senior and subordinated CDS trade at their long-term average relative to each other.

We recommend the following:

HSBC Outperformance vs DB Underperformance trade: Sell 5 year subordinated CDS protection on HSBC at approximately 138 and buy 5 year subordinated CDS protection on DB at approximately 180 for a DB / HSBC cross of 1.30x. We target taking profits at 1.42x and recommend a stop-loss at 1.18x. This trade sunsets in one month’s time.

Alternatively, one may position via a short DB, long Credit Suisse or UBS as a means to capitalise on the stress tests. However, note that CS and UBS are not in the EU and, as such, are not subject to the tests.

As for what the tests mean in the short- and long-term:

Given the depth of disclosure and the need for the European Banking Authority to be seen as having been tough on the banks, we anticipate a broad, short-term, positive impact in the market. We expect the market to score these results not based on the number of banks that fail or almost fail, but based on whether those that are expected to fail, actually do fail. This test is simple, the lower the credit rating or the higher the credit default swap number, the greater the expectation of stress test failure by the market.

However, we would not confuse a relief bounce with long-term credit spread recovery. The issue has moved on from when the tests began. We do not mean to pick on any one set of banks, but as an example, in our view, the fact is that the largest Spanish banks pass the EU bank stress tests will not make it any easier for these or any other Spanish institution to issue Cedulas Territoriales or other debt in the capital markets.

The issue is more systemic than idiosyncratic and we expect the market to toss aside these results over time. We note that unlike the Irish banks, Greek banks did not bring their current circumstances upon themselves. These circumstances have come about due to the difficulties of the Greek sovereign to fund itself in the market; until the EU addresses this concern with a creditable, long-term solution, this situation will put pressure on all eurozone banks as the same circumstances could be repeated in other, larger EU countries.

Translation: expect stress test "upside surprise" halflife to be measured in minutes if not seconds.

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Cognitive Dissonance's picture

Is "Near Fail" like "Almost Pregnant".

Just askin'

equity_momo's picture

No its like touching balls in a 3 way. Near gay.

Cognitive Dissonance's picture

Not that you would know anything about that. :)

Speaking from the male point of view, just go with two females and avoid the issue entirely. I always say that it is better to prevent disasters than to deal with them after the fact.

ads56's picture

WOW, with Deutsche Bank on there, thats big!

baby_BLYTHE's picture

Deutsche Bank is a Rothschild consortium that was used to financie Hitler as he came to power.

Thus, it will never be allowed to fail.


The Deutsche Bank helped to create Hitler because he represented war profit. During the Second World War, the Deutsche Bank profited when it took over banks and industries in occupied countries

Conrad Murray's picture

Quite the rabbit hole to start down. Standard Oil, I.G. Farben, The Federal Reserve Corporation, the Bush's, Auschwitz, and so on. Some say Hitler himself was a Rothschild.

Ahmeexnal's picture

Spot on, BabyBlythe.
Not only DB, but most of the current big names in german industry were also heavily involved in the thousand year reich pipedream: VW, Bayer, BMW, etc...

Will they once again rally behind a lunatic Merkel in their psychophatic urge to cleanse the world of "inferior" greeks/spaniards/irish/portuguese/italians/non-aryans??

D. uber alles?

They have already managed D. uber Griechenland.
Who's next?

Popo's picture

The CDS market sees a 9/10 chance of a Greek default of some kind.

The so-called "Stress Tests" didn't even include the *possibility* of a Greek default.

Say no more.

slaughterer's picture

Deutsche Bank has one of the best risk management systems of the European banks.  Hugo Benzinger is a genius.  His approach is all based on military strategy learned in the Swiss army.  SocGen is full of it or has a grudge.  I mean, how is SocGen better?  

equity_momo's picture

Financial risk management. Genius'. Swiss army. Military strategies.  

Possibly the funniest post i have read in months.

slaughterer's picture

Glad the ZH court jester made you laugh. 

Ikea nesting instinct's picture

I think taking old fashion banking out of banking was one of the reason we got into this mess...

DrunkenMonkey's picture

Précisément. SocGen is a basket case, as is Paribas, but don't shout about it.

sabra1's picture

funny how these results are released only after the european markets close!

AccreditedEYE's picture

We recommend buying subordinated CDS protection on Deutsche Bank and we recommend selling subordinated CDS protection on HSBC as a means to hedge against

Not saying that I disagree with the strategy, but at what point do we start worrying about who our counter-parties are on these trades? And who are the "kind souls" offering protection from the storm? ... mostly other insolvent banks and under-funded pensions. haha

Coldfire's picture

This Hank Calenti dude should step away from the crack pipe. Both Deutsche and Commerzbank have government printing presses in their basements.

Cognitive Dissonance's picture

At this point crack might just be our best friend. I always close my eyes just before the head on car crash.

But that's just me. :)