Our Experts Comment the Times Series

See All the Comments

Awaiting Fiscal Support

23 September 2019 by jbchevrel

Today the sentiment on German banks confronted the sharp € core rates bull flattening (DBR 2y -2.3 5y -4 10y -6 30y -7.7 and there is no 50y *yet*), mainly due to disappointing flash Sept PMIs this AM. That adds to existing concerns around a potential manufacturing-driven German recession. The German economy is having its worst downturn in ~7y due to manufacturing. Factory activity dropped fastest in ~10y in Sept and services /labour market softened too. PMIs came to 41.4 in manufacturing (vs 44 expected 43.5 prior), 52.5 in services (vs 54.3 expected 54.8 prior) and a contractionary 49.1 composite (vs 51.5 expected 51.7 prior). German banks underperformed, largely on the back of that development. Commerzbank (CMZB) saw its stock drop about -7.5% and Deutsche Bank (DB) dropped -3.5%. In our space, DB SLAC 5y (dec24) CDS is +8bp wider to almost 160bp and DB SUB is +15bp wider to 325bp. Similarly, CMZB SLAC 5y CDS is +5bp wider to almost 80bp and CMZB SUB is +11bp wider to 155bp. The VDMA engineering industry group said today there is no turnaround in sight, they predict production will drop -2% both this year and next one. While it sounds like the picture is going to worsen, it is tough to gauge what is already priced in in the market in terms of fiscal stimulus expectation, which is broadly thought to be contingent to a technical recession. With both tariff risks from the US and Brexit risks, there are indeed many paths on which the slowing in manufacturing could last. More specifically regarding the #2 German lender, Moody’s today wrote that CMZB’s planned sale of its 69% stake in Polish MBank was credit negative, as that will further limit CMZB’s growth potential, given MBank was meaningfully contributing to CMZB’s revenue / profit. MIS said this plan will add to pressure from low rates on profitability, expecting an ROE of about 4%. On this subject, a Bloomberg Intelligence piece warned that in the case of CMZB/MBank, the restructuring charges will probably about offset the cost savings… As far as #1 German lender is concerned, another theme going on is that DB Qatari shareholders (>6% stake via Paramount Services Holding Ltd and Supreme Universal Holdings Ltd) seem to be directly approaching candidates to replace DB’s Austrian ex-GS chairman Achleitner. Some representatives of the Qatari royal family have reportedly held talks with an international recruiting firm as they review potential executives. Cuts in both staff and branches still seem like the main axes for German banks to unlock more profitability (from RoTE of c2% and c4% respectively) in the medium term. While some sell-side dealers call for an accelerated pace of ECB APP in the coming months (ex: to ~€30b/month), the main upside risks still seem to be on the fiscal side.