EFTA00638919.pdf

From: To: Subject: Date: Attachments: Inline-Images: Richard Kahn "Jeffrey E." <jeevacation(r;gmail.com> Fwd: European Banks: DB: Stay High in the Debt Stack Fri, 30 Sep 2016 18:04:16 +0000 EUROPEAN 20160930 0000.pdf ms-logo-138.png; header-research.png; product-logo.Idea.png; image001.png; image002.jpg; image003.jpg; check.png; mac_appstore_136_33.png; google-play_111-33.png; MarketingCampaign.jpg Richard Kahn HBRK Associates Inc. 575 Lexington Avenue 4th Floor New York, NY 10022 tel fax cel Begin forwarded message: From: "Atlas, Andrew S" < Subject: European Banks: DB: Stay High in the Debt Stack Date: September 30, 2016 at 12:02:52 PM EDT To: "Richard Kahn ( )" Hey Rich, Just wanted to wish you and the family Shanah Tovah!!! Also attached a note Morgan Stanley Research published today on European Banks. Hope to hear from you soon. Best Always, Andrew Andrew S. Atlas First Vice President Equity Sales/Middle Markets Group Financial Advisor Morgan Stanley Wealth Management 1290 Avenue of the Americas. 12th Floor I New York. NY 10104 NMLS IO # 1326736 EFTA00638919 Is; Is; Is; H' H' H' H' H' H' lac European Banks DB: Stay High in the Debt Stack Read Full Report (PDF: 10 Pages) Europe Jackie Ineke, Greg Case September 30. 2016 We expect a settlement with the DoJ of -$6bn, ahead of the US election. In this scenario, we should see a rally across the debt structure, but with best risk/reward in the seniors, with Germany's subordination law not due until Jan 1, 17. We also add Tier 2 here, to benefit from any bounce. We expect pragmatism to prevail with Deutsche attracting a -$6bn fine from the DoJ for its past actions in the primary RMBS market - though of course we acknowledge that there are high risks in EFTA00638920 predicting the outcomes of judicial cases. A $6bn fine would keep Deutsche's fully loaded CET1 ratio above 10.5%. At 2Q16 Deutsche had a 10.8% fully loaded CET1 (12.2% transitional) and €5.5bn of litigation provisions where we assume not all is earmarked for RMBS-related cases. On top of this Deutsche announced this week the completion of the sale of Abbey Life, netting an additional 10bp of CET1 and the bank stands to gain a further 40bp when its stake in HuaXia is finally sold. Management expects HuaXia to complete in 2H16. There has been a wide range of outcomes for the banks that have settled so far. The read-across to Deutsche is made more difficult by the opacity of the alleged infractions and the different business model and market share of each defendant. The precedents so far were all primary market underwriters but some also owned retail originators, whereas Deutsche is largely a primary underwriter but has the added complication that its trustee business is involved too. On top of this complication, in previous cases the bid/ask spread between the DoJ's opening offer and the final result ranges from 34-84% of original ask. Depending on the provision utilisation, a fine of $6bn would take between zero and 135bp off Deutsche's CETI ratio. For illustration, if one assumes €3bn of provisions are earmarked for the DoJ settlement, then the impact is 65bp on CET1, leaving DB with a CET1 ratio of 10.3% at 2Q16 pro-forma (inc. Abbey Life) and €2.5bn of litigation provisions for issues such as Russian mirror trades. We expect the market would rally on this outcome, as a potential near-term solvency event is taken off the table. Seniors should be relatively safe, with the German senior subordination law due to take effect from January 1, 17. This leaves senior still difficult to bail-in legally in 2016, in our view, and with €18bn of sub debt below it and the systemic issues a senior bail-in would cause, we don't imagine the SRB/ECB will want to enforce losses, and also believe state aid rules would allow for this discretion. Given our expectations of a manageable settlement, we believe Tier 2 also offers decent value here and should rally with seniors but offering less downside protection. In AT1, we prefer to stay away from the bonds, despite our constructive short-term view. ADI is still a material risk for coupon payments and YTPs only look like fair value to us - in line with peers like RBS and Unicredit. Prior DoJ RMBS Settlements - a $6bn fine would represent a 43% settlement for Deutsche, well below that of Citi EFTA00638921 Source: Morgan Stanley Research. Department of Justice. Bloomberg Trade Recommendations • Buy Deutsche Bank seniors and Tier 2 • Continue to avoid Deutsche Bank AT1 • For full details, pricing and risks see end Read more... AUTHORS MORGAN STANLEY & CO. INTERNATIONAL PLC Jackie Ineke +41 44 588-1007 EMAIL MORGAN STANLEY & CO. INTERNATIONAL PLC Greg Case ♦44 20 7677-0406 EMAIL Institutional Investor Survey Request Your Ballot EFTA00638922 Institutional Investor All-Europe & All-Europe Fixed-Income Research Polls are now open. We hope you have enjoyed our research over the past year and appreciate your support. Read Morgan Stanley Research anytime, anywhere... 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