Goldman is on a roll: after crucifying JCP only to underwrite their disastrous following on offering (which is already down 4% from the offering price and has to be a world record in the shortest time to rape muppets), it is now Deutsche Bank's turn. To wit: "We revise our forecasts, to reflect the communicated revenue outlook, litigation provisions and dividends. We now expect a marginal loss in 3Q." More: "DBK’s warning on 3Q FICC revenue and an expectation of clarity regarding the Fed proposal “very shortly” warrants an update; we continue to rate DBK shares Sell, and see better upside potential elsewhere in the sector" and the punchline: "Following the Fed proposal’s implementation, we expect severe revenue/profit pressure, driven by a constricted ability to “export” lower funding costs across the Atlantic and operational disruption." So how many hours until DB announces a Goldman-led equity offering?
Full note:
Clarity on Fed proposal “very shortly” should eclipse 3Q; Sell
What's changed
DBK’s warning on 3Q FICC revenue and an expectation of clarity regarding the Fed proposal “very shortly” warrants an update; we continue to rate DBK shares Sell, and see better upside potential elsewhere in the sector. Firstly, DBK’s 3Q guidance (September 25), warned investors: (1) on weak 3Q FICC revenue, and (2) additional litigation charges. In addition, recent comments suggest (3) a reduced dividend outlook. Together, these statements are clearly negative, our revised 3Q estimate looks for a net loss of c.€100 mn; we cut our 2013-15E DPS to €0.75. Secondly, DBK suggested that clarity on the Fed proposal is near – new leverage rules for US BHC leave us incrementally more concerned on its impact on DBK.
Implications
The revenue outlook grabbed headlines. But, news that DBK expects the final detail of the Fed proposal “very shortly” is the more important message, in our view. Our revised estimates assume higher capital intensity of DBK’s US business due to higher leverage requirements for US BHC and our expectation that the Fed will hold foreign banks to the same standard. We now estimate the post-mitigation, intragroup, capital transfer needs to the US at US$8.2 bn (was US$4.5 bn). Giving DBK full credit for “DTA management” results in a capital transfer estimate of US$4.5 bn (was US$0.8 bn). Following the Fed proposal’s implementation, we expect severe revenue/profit pressure, driven by a constricted ability to “export” lower funding costs across the Atlantic and operational disruption.
Valuation
We revise our forecasts, to reflect the communicated revenue outlook, litigation provisions and dividends. We now expect a marginal loss in 3Q.
And as a reminder, this is what DB's notional derivative book looks like [4]. Be careful Goldman what you wish for: some may actually start paying attention.
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