Deutsche Bank or financial health of European banks?

Key words: CDS prices, Major banks, Derivative exposure, Deutsche Bank and its peers
Deutsche Bank

What do we say about the Deutsche Bank financial stability? As of February 8, 2016, the bank published information related to its payment capacity in the 2016-2017.
As it appears, there is sufficient funds to pay Additional Tier 1 coupons of approximately 0.35 billion EUR on 30 April 2016.

Nevertheless, can this bank collapse? The announcement doesn’t tell us…

Deutsche is one of the pillars of corporate Germany with derivatives position almost 15 times as large as Germany’s GDP.
With over $50 trillion in gross notional derivative, what can happen if Deutsche Bank goes down?
By the way you can easily compare these derivatives with the US Total Debt …just unbelievable, what is reality?

Deutsche Bank prices
But are these quotes real? Deutsche’s story, thus far, is hardly a tragedy.

Financial statements tell us the story:
It is barely profitable, having Net Income only 1.6m EUR last year on assets of 1.7 trillion EUR resulting in ROA of just 0.1%.
Estimated Net Income is -4.2m EUR
Estimated ROE is -6%, estimated EPS is -3

The table below shows what happens in reality with the bank compared to its peers:

Deutsche Bank and its peers
Is it worth investing in the stock? Financial leverage is too high but what about other European banks? The table shows that in average, they have financial leverage twice as high as American peers and may face liquidity problems. Take into account that Deutsche has diluted existing shareholders twice in two years by issuing new equity.

So what is a true price? My valuation simply sets the true price of the bank at the level of $0.00 which is highly possible if events continue on their current trajectory. In this case, what happens with the derivative exposure?

Somebody will make a remark that notional amount of $54 trillion isn’t the market value of outstanding derivatives. Actually, this is true and the market value should be lower, much lower. But… implying that a $54 trillion derivatives book may be on the verge of collapse, Deutsche Bank won’t go down alone, rather it will take along with other global banks. This will trigger a systemic banking contagion and taking into account that many global banks, as well as Deutsche, are tied to derivatives related to Interest rates, FX, Commodity, Equity markets, what can happen with these markets?

Remember what happened in 2008? Just take a quick look at GBP/USD. The same may happen again but now in a larger scale. Say, GBP/USD is 0.8, gold at $2000/oz, EUR/USD around 0.7 etc…The market value of derivatives can change drastically. According to some sources, it would result in the complete breakdown of the European Monetary Union with a daisy chain of derivative failures for the $1.6 quadrillion derivative market. Wow…is it 1.6 multiplied by 1 000 000 000 000 000? One thousand million million? Really? Driver, please stop the Earth, I need to get out!

Even ISDA/CSA and daily margining will not help to eliminate credit derivative exposure if market prices move sharply. Banks will try to sell collateral exposure to the market and it will give additional impulse to market prices acceleration.

Today, CDS quotes shows “who is who”:

Deutsche Bank CDS
Morgan Stanley’s CDS spreads are little tighter these days, compared with 2011-2012 but what about Deutsche Bank?

CDS prices for major banks

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