Thread by @jeuasommenulle

Yeaaah it’s results day at #Deutsche bank and I know what all you guys want is a #Deutsche thread. I feel a bit useless because @subfincredit basically said everything you need to know yesterday, but let’s try!

1st the results: well, they’re shitty, but in the ‘shitty like always’ kind of way. So no drama. 300m loss, close to consensus, ROE of 0.4% for FY 2018 (please don’t laugh, it’s not funny) but the underlying is also 0 vs 100m expected profit.

Strategy has changed, like every quarter: now they are going to reduce costs and increase revenues. Sounds familiar? Yeah, I wonder why. I guess they are going to fudge the FTE numbers again.

After SG the other day, everyone was watching the market risk capital requirements and they 'delivered' : a big increase which is bad not for capital itself (they have plenty) but because it means the biz is even less profitable.

CIB biz was not good: pre-tax loss of -€370m with every single business missing consensus. Yikes.

But of course, the only thing that matters now is: what about that possible merger with Commerz? So let me elaborate on that. First you need the understand the problems of Deutsche.

Deutsche has enough capital and too much liquidity. I repeat: Deutsche has enough capital and too much liquidity. Also: Deutsche doesn’t have a big problem with size of is derivatives books. That’s just fake news for ZeroHedge readers

I’ll even give you a nice investment tip: when ZH stories about the size of DB’s book start to make the rounds, it’s time to buy.

So what’s the problem: simply that DB doesn’t make money. They have two big businesses, German retail after the DPB acquisition and CIB – none of which has a high enough ROE.

On CIB they made a huuuuuuuuge strategic error just after the crisis: they decided to stay in the low risk, flow businesses that were hammered by regulations when everyone was retreating.

The argument was: we’ll be the last man standing and margins will be great. They badly miscalculated the role of US banks which have been gaining market share consistently and hammering them.

Also: DB’s bonus pool is ridiculously too high and if often looks like the bank is managed by the CIB bankers.

Also: because they had to raise so much capital because of the leverage ratio, they couldn’t invest in IT and their systems are now a nightmare. Most of it is still probably in some weird coding language from the 70s that nobody uses anymore.

Retail is a completely different problem. This is a systemic problem: the German banking market is broken because Germany has almost as many banks as the rest of the EZ combined!!! And 50% of that market is controlled by non-profit bank.

I’ll repeat because it’s a stunning figure and underappreciated fact about the largest EZ economy: 50% of the market is controlled by Saving banks, Cooperatives, Landesbanken which are not for profit biz. Competition is a nightmare.

So it’s not a surprise that all big German retail banks have very low profitability – how can it be different when your competitors price loans based on… whatever. Let’s not even dwell on that.

That’s where a DB/Commerzbank deal kicks in. It could reduce costs in the retail biz maybe even substantially (20%-ish.) Because the combined bank would probably move up a bucket in the GSIB list, CET1 requirement would probably be 50bps higher and

Overall the credit profile would substantially improve for DB. This is important because DB’s CIB business always takes a hit when its CDS is above 200bps-ish and the corporate business is tough for margins when you’re BBB

There are also two important changes: 1) the SSM used be super reluctant about big mergers with the stigma of TBTF still very much there. Now, they’ve probably realized that a GSIB with a 0.4% ROE is a bigger problem than…

Well pretty much anything except a large systemic Italian bank when the elected leaders talk about Uscitalia (or Italxit). That explains why the SSM has shifted its policy and now explicitly supports big M&A. This is a BIG change.

Second: politics changed in Germany. Schauble didn’t like bankers, he liked German saving banks and had no interest in dealing with the problems of DB. Scholz and Kukies are different, especially Kukies. He was a former head of Goldman for Austria and Germany and…

Goldmanites loooove doing deals ! It’s in their DNA. Also he has a probably much better view of the issues DB is facing.

So would this be a good deal after all? I honestly don’t think so: even if the paper synergies are OK, the bottom line EPS improvement is very low (partly because even an all-share deal could require fresh equity at distressed pricing despite the badwill) and

The track record on German banking M&A is abysmal (think HVB, Dresdner, Deutsche Postbank…) and getting the synergies done is a nightmare. Germany is a lot like France there. So the execution risk is enormous for a small benefit.

But the bottom line is this: the current situation can’t go on forever. Once upon a time the management was hoping that ECB rate hikes would save them, but it’s getting increasing clear that it’s not enough.

So something has to happen: will it be a big M&A or (finally) a drastic strategic overhaul? I honestly don’t know, sorry for that! /end

tagging the usual DB friends @dsquareddigest @odtorson @Frances_Coppola @MarketElf