The Bankwatch

Tracking the consumer evolution of financial services

The power of positive thinking from Deutsche Bank

This is a very sensible article by Neil Hume at the FT.  He notes the extraordinary growth in bank stock prices since the infamous CitiBank memo in March, wherein he basically pronounced the worst as over, because he had removed the bad people, was instituting new processes, and working with Government.

What struck me is this quote from an analyst at DB (emphasis added)

On London: Banks’ rehabilitation could take time

Add it all up, and the reason banks have rallied is investors are no longer worried about nationalisation and are prepared to look through two years of rising bad debts and impairment charges to a recovery. “There is increased appetite from the market to accept 2009 and perhaps 2010 as lost years from a bank profit perspective and buy stocks for post-recession earnings,” says Jason Napier of Deutsche Bank.

Hmmm…  all I can say is I don’t think so.  Since when is the market willing to wait beyond 1 quarter, let alone 2 years?  Such thinking is precisely the kind of thing that pressed the exuberance of the last few years before this crisis – the ability to rationalise perverse events with thinking that sustains the perverse events.

As Neil points out there is much news still to come:

  • more stress test results
  • more economic events – just this week it has become clear that the projections on the economies of all advanced economies were overstated by orders of magnitude.
  • additional regulation – still to come

In my view, the impact of deleveraging has not yet hit the Banks’ of North America or UK.  Their capital bases are razor thin, with extraordinary levels of debt to equity.  Just one event can wipe that out.  It is painfully strange that the US Fed as again yesterday deferred the announements on the stress tests of the 19 banks’, 19 banks’ who as far as I can determine have yet to be named.  If the news was good one might assume the announcements would have come back in March?  The jury remains out.

Written by Colin Henderson

May 2, 2009 at 12:45

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