From the Fleet Street Letter (Great Britain) –
If you believe that bonds are mispriced – and that yields will rise over time – then the banks offer an opportunity. The good ones are cheap, and under normal circumstances they enjoy a privileged position within the financial system. As for the banks that are not fixed, that’s another story. Despite falling by 90%, the bad banks may not be as cheap as they appear.
Take Italy’s Banca Monte dei Paschi di Siena. Lovely name, except the shares have fallen by 90% three times consecutively since 2008. The share price is now close to 20 cents. If it falls to 2 cents, that’ll be four times. It has total assets of €164 billion and is valued at just €560 million. It ranked bottom in the bank stress tests.
DB is in slightly better shape. Its balance sheet is reported to be €1.8 trillion. That puts it in the same league as HSBC or Citigroup. It differs in that DB hasn’t grown deposits since the European crisis in 2011. To a bank, customer deposits are like oxygen. DB has reduced costs and bolstered capital in recent years but as you stated, DB is very active in derivatives. It has a massive book of business from which rumours circulate. I’ve shown the credit default swap (CDS), which is a measure of balance sheet risk for DB, HSBC, BNP Paribas and Citigroup. I believe this is a much better gauge of risk than the share price. The bonds measure risk. The shares reflect opportunity.