13 September 2019 by jbchevrel
Today the sentiment toward German banks was boiled by the € core rates bear steepening move (DBR 2y +1.5 5y +4 10y +7 30y +10.5 and there is no 50y *yet*), adding itself to the prospects of saving costs from the ECB-announced tiering thing. Commerzbank (CMZB) saw its stock rise about +6% and Deutsche Bank (DB) rose more than +3.5%. In our space, DB SLAC 5y CDS is back to 140bp area from ~210bp at the beginning of this summer. DB SUB is back from 440bp area to 300bp area over the same period. CMZB SLAC 5y CDS is back to ~60bp from ~100bp and CMZB SUB is back from ~210bp to ~130bp. A JPM note cited by BBG highlighted that DB will save c€200m per year thanks to tiering (~10% of future expected PBT, for the year 2020..) and CMZB will save c€100m (~6% of expected 2020 PBT). Those figures look high, so what is the full piece of cake size? So far, recourse to €CB depo facility (~€600B) and current account holdings (~€1,300B) were charged -0.40% if not part of required reserves (~€130B), i.e. excess reserves are c€1,800B. ECB-announced ‘six-time’ means c€800B will be at 0% instead of new depo rate (-0.5%) from Oct 30th this year. The remaining ~€1000B will be charged -0.50%. So the annual cost of the ‘Draghi tax’ came from ~€7B per year to ~€5B per year. The full piece of cake (for the whole €system banks) is therefore ~€2B per year. The two German lenders are (optically) getting the biggest benefit having relatively higher ECB deposits subject to new rule and among the weakest profitability, if measure by ROTE. It is worth noting that the outlook does not look great, although the pricing for further cuts and the tiering thing help price action in the short term. It is also worth mentioning that the amount ‘saved’ by €system banks per year will inevitably erode as excess liquidity grows further (mainly due to APP2 announced yesterday – basically €240B/year and to a lesser extent due to TLTRO). Going into next week, all eyes will shift to the US, where the Fed gathers next Tuesday/Wednesday, after the 10-year US Treasury rates have soared 20bp over the past 24 hours or so (!). The priced in Sep 18th hike is pretty much intact but what a bear steepening in the H1-2020 part of the curve. June-2020 came from 110bp a week ago to 145bp. Leading indicators having been weak, the consensus around the probability to see an US recession in the next 12 months is still not great: 35% (BBG tracker) 38% (NY Fed) 44% (Cleveland Fed).