Deutsche Bank Risk Seen Rising as Puts Appreciate Most in Europe: Options

By Cecile Vannucci and Jeff Kearns - Sep 9, 2011 11:32 AM GMT+0700

The price of options to protect against losses in Deutsche Bank AG (DBK) shares is rising more than any other European lender as Germany leads the rescue of nations in the region’s shared currency.

Three-month options that pay owners should Frankfurt-based Deutsche Bank drop 10 percent cost 1.3 times the price of contracts betting on 10 percent gains, according to data compiled by Bloomberg. That’s up from 1.14 at the end of July, the biggest increase among financial firms in the Stoxx Europe 600 Index, data using five-day averages show. Stocks subject to bans on short selling were excluded.

While budget deficits in Greece sparked the crisis, attention is turning to Germany, the largest provider of bailout funds in the region, as concern increases that its efforts will fail. The DAX Index plunged 27 percent this quarter, the third- largest decline behind Italy and Greece, while Deutsche Bank has dropped 38 percent. Josef Ackermann, its chief executive officer, said last week that conditions in stock and bond markets are reminiscent of late 2008.

“Deutsche Bank in Europe is kind of an anchor,” Matthias Fankhauser, a fund manager at Clariden Leu AG, which oversees 90 billion Swiss francs ($104 billion), said in a telephone interview from Zurich yesterday. “The pressure recently on Germany, on the DAX, probably had a big impact on Deutsche as well. We saw weakening and quite weak economic data recently, which really shows that the economy was losing momentum at a high speed.”

Falling Euro

The European Central Bank said risks to the economic recovery have intensified, sending the euro down 1.5 percent against the U.S. dollar yesterday. Credit-default swaps on Greek government debt reached a record, signaling a 91 percent chance the nation will fail to meet debt commitments. Germany is the chief underwriter of emergency loans offered to Greece, Ireland and Portugal, contributing about 27 percent of the total because it’s Europe’s biggest economy.

The benchmark gauge of European options prices, the VStoxx Index (V2X), slipped 4.2 percent to 41.63 yesterday. The index tracks prices for options on the Euro Stoxx 50, which rose 0.6 percent. Its U.S. counterpart, the Chicago Board Options Exchange Volatility Index, or VIX, rose 2.8 percent to 34.32.

Investors are betting against Deutsche Bank because of risks from the debt crisis even as the company projects the lender will increase earnings this year, said Dirk Becker, a financial industry analyst at Kepler Capital Markets in Frankfurt who has a “buy” rating on the stock.

Slowing Growth

Deutsche Bank had net sovereign risks related to Portugal, Italy, Ireland, Greece and Spain of 3.67 billion euros ($5.1 billion) on June 30, the company said July 26. Net income will surge 139 percent to 5.53 billion euros in 2011, according to the average analyst estimate in a Bloomberg survey. Growth will slow to 9.2 percent in 2012, the data show.

“It’s one of the most hated stocks in the universe,” Becker said in a telephone interview yesterday. “People believe the European debt crisis may end in some kind of worst-case scenario such as a euro breakup or sovereign default, and if those things happen Deutsche Bank is one of the most interconnected banks and would obviously be one of the big losers. That’s what is being priced in.”

Christian Streckert, a Frankfurt-based spokesman for Deutsche Bank, declined to comment.

The lender has tumbled 49 percent from its Feb. 16 high, including a 35 percent loss since the end of July. The shares sank to the lowest price since March 2009 on Sept. 6. Deutsche Bank had the fifth-biggest drop in the Stoxx 600 Banks Index during the past month, behind three Greek lenders -- EFG Eurobank Ergasias, Alpha Bank AE and National Bank of Greece SA -- and Paris-based Societe Generale (GLE) SA.

Profit Forecast

Deutsche Bank said yesterday that if capital markets and the sovereign debt crisis improve, it will reach its forecast for 10 billion euros in pretax operating profit this year. Ackermann said Sept. 5 that volatility and uncertainty were the “new normal” in markets and banking.

Investors are snapping up Deutsche Bank’s December 22 euro puts, which are priced 12 percent below yesterday’s stock price of 24.89 euros. The number of existing contracts surged eightfold to 9,681 in the past two weeks, the most among the company’s equity derivatives, data compiled by Bloomberg show.

While options traders are becoming more pessimistic about Deutsche Bank, they’re paying less for insurance against U.K. lenders. Put costs have fallen since July 29 in relation to calls for Lloyds Banking Group Plc, Royal Bank of Scotland Group Plc and Barclays Plc, according to data compiled by Bloomberg. The Bank of England said in June that the euro-area debt crisis poses the biggest risk to the stability of the nation’s financial system.

Short-Sale Bans

Deutsche Bank’s options prices may show more pessimism than other lenders because some European countries have curbed short selling, according to Justin Wiggs, who trades financial stocks at Stifel Nicolaus & Co. in Baltimore.

Stocks dropped worldwide on Aug. 25, including a slump of as much as 4 percent by the DAX, as France, Italy and Spain extended restrictions on short selling, which involves the sale of securities borrowed from the owner in a bet they fall. Spain and Italy extended their bans through Sept. 30. France’s Autorite des Marches Financiers said its ban could last as long as Nov. 11. The regulators all said they might lift the bans on short selling of financial stocks when the market stabilizes.

‘Ongoing Pressure’

“The fundamental thing is you can’t do it in other markets,” Wiggs said about the short-sale bans in a telephone interview yesterday. “There could be ongoing pressure on German markets because people want to be short and there could be some pricing skew because of that.”

Deutsche Bank’s core tier 1 capital ratio, a measure of financial strength, would be 7 percent in 2012 if all so-called Basel III rules from the Basel Committee on Banking Supervision were applied, Mediobanca SpA’s Christopher Wheeler said in a report yesterday. That would trail rivals such as UBS AG, HSBC Holdings Plc and Goldman Sachs Group Inc., the analyst said.

The Frankfurt-based bank is “confident” it will meet Basel III capital and liquidity requirements early, Chief Risk Officer Hugo Banziger said in a presentation on June 10.

“For Deutsche, the question always has been do they have enough capital, and that discussion is still going on,” Florian Esterer, who helps oversee about $55 billion at Swisscanto Asset Management AG in Zurich, said in a telephone interview yesterday. “The company always said ‘we don’t need any more capital so quit bothering us,’ but the underlying risk is that they’re not sufficiently capitalized and they will need to raise equity.”

To contact the reporters on this story: Cecile Vannucci in Amsterdam at cvannucci1@bloomberg.net; Jeff Kearns in New York at jkearns3@bloomberg.net

To contact the editors responsible for this story: Nick Baker at nbaker7@bloomberg.net; Andrew Rummer at arummer@bloomberg.net