Invast Blog

Is Deutsche Bank too big to fail?

Yes. At some stage, DB will be bailed out. But that doesn’t mean you should buy the stock at these levels as a trade. We’ll explain the difference here.

Banks like DB are too big to fail because of the contagion they will cause on the overall financial system. So what happens is:

– Governments will look to first secure deposit holders through banking guarantees

– The Board will have to go to market to raise equity to replenish its balance sheet

– Equity holders will be screwed once again. DB stock is sitting at 30 year lows as of the time of writing.

When buying a bank, traders and investors should be aware of the difference between governments guaranteeing deposit holder funds and guaranteeing equity value. The two things are very different. So if you are hearing suggestions that DB is a buy because “it’s too big to fail” just remember that buying DB is buying equity and equity is the lowest form of ownership, with almost no chance of being bailed out by any government.

DB’s equity value is really just a guess because the asset and liability side of the balance sheet is all up in the air. DB’s asset book is to complicated and layered with derivative instruments that it is near impossible to predict the true value.

That is why institutional investors have been fleeing the stock. Opportunists will see this as an opportunity to buy “value”, but we think this is a trap. Buying value over an industrial business is very different to buying value in a large and complicated bank.

We think DB will eventually have to raise equity, despite what management is saying. The capital raising will be at a deep discount and heavily dilutive. Once this is cleared, there will be an opportunity to trade the stock on the hopes that the worst is behind. The quicker the capital raising, the less damage.

Bottom line: Governments and central banks will bail out deposit holders, companies and investors need to bail out equity holders. The two scenarios are very different and should not be taken as being the same.

So for now our advice is to completely avoid DB stocks until the trigger event of a capital raising takes place. At that point we will reassess the situation and advise Invast clients of the appropriate trading call. Our DMA CFD offering means clients have access to some of the world’s largest exchanges, allowing them to trade opportunities like DB.

DMA CFD’s also allow traders to take long or short positions, which means being able to trade DB on the way up or down. If you haven’t yet opened an account, you can self-navigate through our simplified account opening process here.


Happy investing,

Peter Esho

Chief Market Analyst

Peter Esho is a member of Invast’s Investment Committee and Chief Market Analyst at Invast Financial Services in Australia.   The Invast’s Investment Committee constructs professionally constructed global thematic portfolios of Direct Market Access (DMA) CFDs over highly liquid global shares and ETFs through its new PortfolioInvestor platform. Since 1960, the Invast Group has grown to become one of the largest and most successful global brokerage firms, offering state-of-the-art trading technology and unparalleled service catering to all levels of traders.

Invast Financial Services Pty Ltd (ABN 48 162 400 035) is regulated by the Australian Securities and Investments Commission and holds an AFS Licence 438283 which authorises it to carry on a financial services business in Australia.

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