On a day in which DB appeared set to tumble into the a abyss, we saw the defensive cavalry emerge in full force, starting with a letter by the CEO bashing “speculators”, a massive short squeeze with no locate available, a twitter rumor of a settlement being picked up as unconfirmed “news” by a reputable French agency (which apparently has better access to events in Germany than the German press), and moments ago Bank of America chimed in when it upgraded DB’s credit to “Neutral” even though BofA paradoxically admits that “DB’s credit profile likely to remain weak” saying that “we do not particularly like the profile of a credit where performance is skewed to an outcome that is so inherently unpredictable – in this case, guessing what a regulatory fine will be.”

BofA adds that in its view, the German bank “is now experiencing a nasty confidence shock which will likely impact its franchise into the medium-term. It could be that a capital increase is on the horizon, after the fines have largely been settled. In our opinion, DB is likely to be a weak bank for several years from now, though, even with a capital increase.”

It concludes as follows: “in our opinion, DB is likely to be a weak bank for several years from now, though, even with a capital increase.”

And after all that, it’s tap on the shoulder upgrade time.

Confused? Don’t worry: everything that happened today was only meant to make sure DB did not enter a 3-day weekend at its all time low price as hedge funds continue to withdraw any excess cash they have with the bank while buying up as much 1 Year CDS as they can find. 

Here is the balance of the goalseeked piece:

Deutsche – wide enough. Upgrade to Neutral

With the strong spread widening that we have seen in recent days across the DB capital structure, we are recommending moving to a more Neutral or Marketweight positioning. We think the spread widening has gone quite far but we are not sure of the timing of any concrete catalyst to reverse the underperformance. We upgrade our ratings on the DB €5%, €2.75% and $4.5% T2 bonds to Marketweight from Underweight. We upgrade the €1.125% senior bond to Marketweight from Underweight. We upgrade our recommendation on Subordinated CDS to Neutral from Buy Protection. On AT1 instruments, we are Marketweight. We downgrade the $4.296% T2 bonds to Marketweight.

Whilst current spread levels point towards a significant level of stress at DB, we remain relatively sanguine. The weak point in DB’s credit profile is not asset risk or liquidity or even on the face of it capital. It is the size of any litigation-related settlements, especially the RMBS settlement with the US DOJ and when these end up being recognised. But even there, our base case has to be that this is a number that the bank can ‘afford’ without asking shareholders for more money – for we would have thought that there is no point setting a fine the payment of which is contingent on a transaction (i.e. a capital raise) that you can’t be sure will succeed. Still less do we subscribe to the idea that DB will seek state aid – it makes no sense at all for Germany in effect to transfer billions of dollars via DB to the US DOJ et al., which is what in effect any assistance to pay the fine would be, in our opinion.

Market expectations are already that the bank will add an additional €2-3bn to its litigation reserves in 2H16 – so this is already in the market. That puts the reserves at the end of the year at ~€8.5bn or so. BofAMLe currently sees a net loss of e.g. €3.7bn for the year as a result of this (though this does not include Abbey Life intangible writeoffs announced in the last week). Should the bank indeed raise its litigation reserves to nearly €9bn by year end (assuming there is no settlement before then), in effect on a reasonable assessment of the cost of settling, DB would be front loading the cost of the litigation – potentially even leaving the door open to being profitable again in 2017, if that doesn’t sound too far-fetched at this point of pessimism. In our view, the big risk to spreads now is that the actual fine(s) come in at more reasonable levels, since the market has already reacted to the possibility of a higher fine. Later on Friday, prices started to recover in reaction to this possibility, we think.

We do not particularly like the profile of a credit where performance is skewed to an outcome that is so inherently unpredictable – in this case, guessing what a regulatory fine will be. This is very different from the Jan-Feb sell-off in DB which was predicated on the non-payment of the bank’s AT1 coupon (inter alia). Hence, we aren’t really that interested in Overweighting DB bonds (again) at the present time in spite of the attractive valuation. Technicals too appear relatively unfavourable. In our view, DB is now experiencing a nasty confidence shock which will likely impact its franchise into the medium-term. It could be that a capital increase is on the horizon, after the fines have largely been settled. This may be a time to have another look at DB. In our opinion, DB is likely to be a weak bank for several years from now, though, even with a capital increase. There will be, we anticipate, future opportunities in its securities based on more conventional credit analysis.

Senior

DB’s senior €1.125% trade at levels comparable on a spread basis now to those of Jan-Feb, though the cash price of the bonds remains about 4 points higher. We see little bail-in risk for the senior bonds, though – the legislation governing this isn’t actually active until 2017 in any case.

Recent comments by Yves Mersch in Munich highlighted that German senior unsecured bank bonds may no longer be eligible collateral for the Eurosystem, we read – this could have implications for German bank liquidity pools which contain, we understand, a significant portion of other German banks’ bonds. Over time, we’d expect more uniformity in the approach to the use of senior bonds as resolution instruments, possibly coalescing around the “Tier 3” concept for those banks without holding companies.

Subordinated

With subordinated spreads now in the +500bps region, DB T2s will again screen as being extremely cheap for many clients.

We do not believe that DB is likely to hit the ‘point of non-viability’ which is a capital level at which the resolution authority would be entitled to call upon bondholders to contribute, if need be, to the bank’s resolution.

AT1s

In our view, the payment for DB AT1s primarily depends on its level of unconsolidated distributable items.

DB has previously guided to about €4.3bn of proforma payment capacity for the AT1s, though this excludes the impact of any potential loss at the unconsolidated bank level. “Final AT1 payment capacity will depend on operational results and movements in other reserves”. Our view remains that the bank is very focused on ADIs and highly incentivised to ensure that its AT1 coupons are serviced and we think AT1s will be serviced. Coupons are due on 30th April, after the unconsolidated accounts are published. The cost of paying the AT1 coupons in 2016 was €0.35bn.

Liquidity

Based on the bank’s most recent disclosures, we do not think that liquidity is a problem for DB. We are mindful of the significant improvements that have been baked into regulation on this front since 2007.

At the end of 2Q16, DB reported liquidity reserves of €223bn. These are cash, high liquid Govvies, and other central bank eligible securities. 56% of this number or €125bn was in cash. This number is likely to dwarf the withdrawal of prime brokerage deposits by hedge funds that was reported overnight by the FT.

The Liquidity Coverage Ratio (LCR) of the bank was 124% at the same date. The surplus above 100% is equivalent to €38bn. The LCR is designed to ensure that market shocks (such as the removal of prime brokerage deposits) can be covered by a bank’s liquid assets over a 30-day stress period.

Fines

DB has €5.5bn of litigation reserves in the consolidated balance sheet, of which €4.1bn is for regulatory enforcement. The bank has a further €1.7bn in contingent liability reserves. Litigation risk is very difficult to assess because understandably banks do not give guidance. Actual agreements may or may not be good indicators because they may or may not reflect elements that differ between settlements, such as whether there is any punitive element, or if there are any other offsets. Few believe that it is in the interest of any of the parties to destabilise a bank that is subject to a regulatory fine, because it just makes it less likely that they can pay it. At our recent Financials Conference, few banks would speculate about outcomes. Some don’t comment about it at all. However, most are anticipating that the bulk of the fines will have been paid by 2017.

Our equity analyst Andrew Stimpson’s current assessment is that DB may have to pay up to €9.3bn in various settlements out to 2017. See Table 1. He is also estimating a further €3.2bn of provisions will be taken this year which would negatively impact 2016e earnings – the bank has guided in any case to a loss this year. This would mean DB would carry approximately €8.7bn of litigation reserves into 2017, assuming that no settlement is reached in the coming weeks. Should settlements come in significantly higher than these baseline expectations, DB may have some flexibility, depending on timing. Recall that the revenue base of the bank, on the basis of 1H16 is about €30bn annually.

Capital

DB’s fully loaded CET1 ratio at end-June was 10.8%. At end 1H16, DB reported CET1 capital of €43.5bn and RWA of €402bn. If the CET1 capital reduced to €40.5bn (or -€3bn), the bank would still be able to report a FL CET1 ratio of 10.1%. On a transitional basis, the CET1 capital number is higher at €49bn, and RWA are €403bn (CET1 ratio of 12.2%). A €3bn reduction in transitional CET1 (for example) leaves us with an 11.4% transitional, still higher than the 2015 SREP of 10.75%. In our view, changes announced in the calculation of Pillar 2 this year is likely mutatis mutandis to lead to a lower 2016 SREP requirement for DB. In other words, we see a low risk of a breach of the transitional SREP ratio.

In terms of the impact on capital, there could be further disposals e.g. Hua Xia Bank or Abbey Life – these already add about 50bps to CET1 capital, for example.

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The USA Imports Record Amounts of Gold from Switzerland! Meanwhile, Deutsche Bank Faces Total Collapse

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For decades, Switzerland had a reputation for bank secrecy that made it the most sought after tax haven for billionaires from around the globe.  But, after more than 80 years of secrecy, a series of bilateral agreements with countries around the world, including America’s Foreign Account Tax Compliance Act (FATCA), have forced the private-banking industry in Switzerland to embrace an entirely new era of transparency that requires a full exchange of tax-relevant information with more than a hundred countries.

Which, as Bloomberg points out, has been a huge boon for Swiss operators of private vaults which are not subject to the same transparency and reporting requirements as banks.  In fact, these super-secret, privately operated storage facilities buried around the Swiss Alps can basically store anything from anybody because they’re not even required to report suspicious activity to Switzerland’s Money Laundering Reporting Office. 

“There is growth in gold,” Wipfli says. “Since 2008 there has been a real interest in alternatives to bank deposits.” The company explicitly taps into that demand. Swiss Data Safe “is independent from the banking system and any other organization or interest group,” according to a PowerPoint presentation Wipfli shows clients. The company and its anonymous rival aren’t regulated by the Swiss financial-services regulator Finma.

 

Nor do such companies have to report suspicious activity to Switzerland’s Money Laundering Reporting Office. In the past, submissions to the agency have led the Swiss attorney general to open investigations into corruption at FIFA, the global soccer body, and banking ties to Brazil’s Petrobras bribery scandal.

Moreover, American citizens aren’t required under FATCA to declare gold stored outside of financial institutions either.  So perhaps it’s no surprise that, according to the Swiss defense department, of the roughly 1,000 former military bunkers still in existence across Switzerland, several hundred of them have been sold to private individuals who are now operating them as private storage sites for the gold stash of the world’s wealthiest of billionaires.

“The gold trade is a huge part of the Swiss economy,” says John Cassara, a former U.S. Treasury special agent and the author of books on money laundering.

 

“I’m not surprised that there are not more effective efforts in Switzerland to better monitor its misuse. The powers that be don’t want to crack down.” In the first half of this year, 1,357 metric tons of gold—worth about $40 billion—were imported into Switzerland, according to the Swiss customs office, putting the year on course to be the biggest since a record in 2013.

And, of course, when you’re storing billions of dollars worth of gold bars, secrecy is a must.  As one unanimous vault operator told Bloomberg, his vault sits adjacent a private landing strip which allows quick access to his former military bunker buried in the granite face a mountain deep in the Swiss Alps.

Deep in the Swiss Alps, next to an old airstrip suitable for landing Gulfstream and Falcon jets, is a vast bunker that holds what may be one of the world’s largest stashes of gold. The entrance, protected by a guard in a bulletproof vest, is a small metal door set into a granite mountain face at the end of a narrow country lane. Behind two farther doors sits a 3.5-ton metal portal that opens only after a code is entered and an iris scan and a facial-recognition screen are performed. A maze of tunnels once used by Swiss armed forces lies within.

 

The owner of this gold vault wants to remain anonymous for fear of compromising security, and he worries that even disclosing the name of his company might lead thieves his way. He’s quick to dismiss questions about how carefully he vets clients but says many who come to him looking for a safe haven for their assets don’t pass his sniff test. “For every client we take, we turn one or two away,” he says. “We don’t want problems.”

Billionaire Tax Evaders: 1; Internal Revenue Service: 0.

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Authored by Marco Perin, originally posted op-ed at Off-Guardian.org,

Mrs. Clinton musters foreign support in a desperate attempt the regain her lead.

In face of her squeezing rating in the US presidential campaign, Hillary Clinton is likely enacting the State Department’s official positions to promote her candidacy to the Oval Office. In the particular Italian case, now she makes use of an alluring proposal she received from an Italian envoy to the Democratic National Convention back in July this year.

The point is that the current Italian Prime-Minister Matteo Renzi fears to lose the upcoming constitutional referendum due to be held only days after the climax of the US presidential campaign. To prevent such development he tried to secure support of the current and future US administrations. During the DNC, when Hillary Clinton was yet a front-runner of the campaign, she was visited in Philadelphia by a Renzi’s delegate, a young attractive rising star of the Italian political kaleidoscope and incumbent minister for constitutional reforms Maria Elena Boschi. While her selfie with Bill Clinton was booming in Instagram, the results of her delicate talk with Mrs.Clinton at the sidelines of the DNC on July 28 went completely unreported (La Stampa published only a preliminary note on that).

In fact minister Boschi requested Mrs.Clinton’s public support of the Italian constitution reform on behalf of the American Democrats. She also redrew Hillary Clinton’s attention to Libya asking her to help easing the US pressure on the Italian government urging it to expand its involvement in counter-terrorist operation in the post-Gaddafi domains as it impacts negatively the Renzi cabinet’s rating. After all, the alternative would most likely be the populist Five Star Movement, a new Italian political conglomerate the American Democrats do not feel any sympathy to.

The two ladies have settled the deal. As a return favor for her lobbying Mrs.Clinton asked to secure support of her presidential race by the influential Italian diaspora in the United States. A media campaign in Italy to discredit Trump and some extra contributions to the Clinton Foundation were also agreed (yet the Italian Ministry For The Environment, Land, & Sea is among the “minor” contributors to The Clinton Foundation with a total donation up to $250,000).

It looks like the American Democrats are already formally complying with their part of the “Italian deal”. During his speech at the G20 summit in Hangzhou Pres.Obama generously praised PM Renzi for “successful reforms” and now is about to host a state dinner for him on October 18, when Renzi arrives to Washington at the lame duck summit. On the other side of the ocean the US ambassador in Rome John R. Phillips sparked a firestorm by unequivocally pressing for the pro-reform voting at a panel discussion on Brexit in the Rome-based Center for American Studies last week.

While Mrs. Clinton is desperately looking for comfortable partners in Europe, her own chances to get elected are vanishing every day. The electorally motivated foreign initiatives of the outgoing US Administration, ignoring the political realities abroad, threaten to seriously jeopardize the American image in Italy and other EU countries.

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At the end of August, we did a follow up article on what we believe is a far bigger marginal driver to the price of oil than OPEC production (which may or may not be reduced by up to 750kbpd in November), namely the Strategic Petroleum Reserve of China, a major importer of oil in recent years, along with India, taking advantage of low prices and largely supporting global oil demand growth at a time of rampant oversupply, and which we profiled most recently in “A Chinese “Mystery” Has Become The Biggest Wildcard For The Price Of Oil.”

The simplest reason why Chiina’s SPR capacity (and storage) is of key importance, is that it determines the ongoing demand China has for oil – of which much ends up in storage –  and also allows analysts to calculate how much more oil China would need, in order to fill up its SPR. While China has traditionally kept any data about its SPR inventory as opaque as possible, in a rare release this month, Beijing reported adding about 43 million barrels of crude to its strategic reserves between mid-2015 and early this year. Reserves totaled 31.97 million tons in early 2016, equivalent to about 234 million barrels, the National Bureau of Statistics said in a statement that was the first government update on reserves since December.

A guard stands before the oil SPR tanks at Zhoushan

As Bloomberg confirmed, emergency stockpiles of the second-biggest oil user have been a source of speculation among analysts and traders, who rely on customs figures and infrequent construction updates to estimate how much of the country’s imports go into strategic inventories, and for how long they will continue to fill.

A few days ago, S&P discussed the critical topic of Chinese reserves, when earlier this week, Jodie Gunzberg, global head of commodities at S&P Dow Jones said at a S&P Global briefing on oil markets in London that “regardless of what happens on the supply side, there’s this wildcard factor of the strategic petroleum reserves.”  Oddly, she used our precisely wording.

As she further explained, “now that China has bought so much cheap oil to fill their SPR, which nobody really knows how much there is (in it), if OPEC does freeze and tries to bring the price back up, China may push it back down because they might choose not to buy it at a higher price and just choose to use their SPR or start exporting it themselves – like they did with other commodities.”

“So I feel that that is, right now, more of a factor influencing how long the low oil prices might stick around,” Gunzberg added.

Not only that but as JPM estimated earlier in the year, the closer China gets to filling its Chinese SPR, logically the less its import demand for crude will be, and as a reminder, JPM speculated that we are now approaching a period when – according to the bank’s calculations – Chinese SPR will proceed to rapidly wane, effectively offsetting any supply reduction by OPEC. As we reported in June, JPM estimated the country built up a total of about 400 million barrels by mid-2016 out of a targeted 511 million barrels.

Perhaps the reason why JPM’s concerns that China was approaching its SPR capacity dissipated, is that when China revealed its far lower number in SPR storage earlier in September, it telegraphed that it has much more “pent up demand.”

However, in retrospect it appears China may have been lying, again.

According to satellite images by  geospatial analytics startup Orbital Insight, China, has not only misrepresented how much oil it has stored, it has done so at a massive scale, with the real number dwarfing even JPM own estimate: the real amount of Chinese oil in storage, according to Orbital, was a whopping 600 million barrels as of May. Assuming JPM’s estimated rate of SPR accumulation of about 1mmbpd, the 600 million number as of May would have grown to well over 700 million barrels as of September. 

Orbital’s figure as first reported by Bloomberg, is well over two times larger than China’s official estimates for strategic petroleum reserves and for commercial stocks, said Orbital Chief Executive Officer James Crawford.

There were about 2,100 strategic and commercial petroleum reserve tanks capable of storing 900 million barrels as of the end of 2014, according to calculations derived from photos tracking the depth of shadows visible on top of the floating lids of the giant tanks. They don’t include underground caverns.

The company’s estimates also exceed projections from forecasters including Energy Aspects Ltd., and help shed light on oil reserves that puzzle commodities traders worldwide. China’s record purchases this year have helped oil prices recover from the worst crash in a generation.

Bloomberg also notes that “the findings are also the latest example of how private technology firms are using big data and machine learning to better measure the second-largest economy, where some official data are incomplete and private gauges have vanished without explanation.”  That is a polite way of actually getting some data out of China that isn’t totally made up.

So why are China’s vastly greater than admitted SPR holdings important, especially in the aftermath of the OPEC “deal”? As Dave Ernsberger, global head of oil content at S&P Global Platts, told the S&P briefing, China’s SPR is a challenge for markets. “The SPR in China is one of a number of unknown factors that mean you can never get too comfortable assuming any set of circumstances in the global oil markets.”

He said the exact size of China’s SPR was unknown, however, making it a risk that was hard to quantify.

“It never suits any buyer, or bulk buyer, to flag to the market how much they want to buy so we’re likely to get a lot of misinformation around that for quite some time to come. SPRs are strategic, as the name suggests, so the government isn’t going to talk about it.”

Which explains why China has been so eager to keep its true SPR holdings secret or simply misrepresent them.

Furthermore, while China might have millions of barrels of oil stockpiled for either its own emergency use or to sell, demand growth from the country is ebbing. The IEA warned this month that “recent pillars of demand growth China and India are wobbling.” S&P Global Platts’ Ernsberger, cited by CNBC, said that the slowdown in Chinese demand was worrying for major oil producers.

“The demand picture is very unsettling for OPEC and for all producers of crude and refined products (and this is seen most significantly in) the slowdown in growth in the Chinese market. China has returned more incremental demand for the oil market in the last five years than any other country in the world and more than almost any of the counties combine. But this year demand growth in China has stalled and that represents a significant change in the environment for producers both in OPEC and outside it.”

“The successors to China who will pick up the slack in demand growth aren’t quite of a size yet to have the impact that Chinese growth has had. So the demand picture is fairly frightening from a producers’ point of view.”

Which, much more than anything, is why OPEC was “willing” to reach a production cut (non) deal: it is aware that its until recently fastest growing client is about to slam the brakes, and the only option for Saudi Arabia and its minions was to produce less ahead of this inflection point. That said, with both supply and demand declining, the overall impact on price will be virtually nil, unless of course price does go up, in which case US shale production is about to go into major overdrive.

And speaking of shale, US producers are already scrambling to take advantage of the recent price spike: as Bloomberg reported moments ago, OPEC is “is throwing a lifeline” to U.S. shale oil producers who have sought to hedge production due to the price rise spurred by the group’s deal Wednesday to cut output, BNP Paribas head of commodity strategy Harry Tchilinguirian said by phone.  “What this OPEC meeting has done is actually throw a lifeline to producers, and in particular U.S. shale oil, that as a result of the spot move and the move in the rest of the curve have come in in droves to hedge production,” Tchilinguirian said.

Tchilinguirian says BNP has “seen many queries coming through as a result of the OPEC decision” which has lifted the WTI curve “to levels acceptable where U.S. producers can hedge.”

Which is good news for shale and gas consumers, and bad news for Saudi Arabia. OPEC, the petrodollar and risk assets.

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