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Virtually all of the big European banks have large exposure to the PIIGS sovereign and/or commercial debt. All of these banks are in strong down trends since last summer. Deutsche Bank (NYSE:DB) may be in Germany, but that does not make it immune. It has invested in the PIIGS along with everyone else. According to data from the EBA stress tests it has $140.61B in PIIGS exposure. It has a market cap of only $33.57B. It's exposure as a percentage of market cap is 419% (the exposure at the time of the stress tests, but today's market cap). DB has a reasonably high stock price at $36.39. It trades at low multiples, but these are at risk. Plus DB earnings estimates have been being steadily revised downward over the last three months.

The two year stock chart gives a perhaps clearer technical picture of the strength of the downtrend. 


(Click to enlarge)

Recent events indicate that the situations in both Spain and Italy are deteriorating rapidly. In Greece they are worse if anything. In fact the ECB yesterday took four major Greek banks off the list of those qualified for its liquidity measures. To me this means that a credit seize up in Greek is growing more likely, and it is quickly approaching. On Monday there was a mini-run on Greek banks of $898 million. Perhaps there will be another one today, after the ECB's action yesterday.

Recently Reuters reported that Spain's government will demand its banks raise a further 35B Euros in capital for provisions against loans. This amount would be in addition to the extra 54B Euros Spanish banks need to raise to cover souring property loans. This may be just the beginning. Spanish real estate problems are legend. With 24.44% unemployment and approximately 80% home ownership, who is going to buy the empty Spanish real estate? STD and BBVA are heavily exposed in this area too.

The Spanish situation is leading to fears about the Italian banks. On Monday May 14, 2012, Moody's downgraded the long term debt and deposit ratings for 26 Italian banks by from one notch to four notches. All of these banks received a negative outlook after the downgrades. Plus this came after Italy's top five banks were asked to raise 15B Euros more in capital by June in order to meet the tougher capital requirements set by the European Banking Authority. Apparently their solvency is more at risk due to the high amount of sovereign bonds they own. This increased recently with the further purchase of such bonds using LTRO funds. With the recently rising yields in both Italian (5.871% today) and Spanish (6.345% today) 10 year bonds, those purchases have devalued. They are putting Italian banks more at risk. Plus those same bond yields are threatening again to skyrocket as Greek, Portuguese, and Irish bond yields have done in the recent past. Such a scenario would present huge capital requirement problems for both Italian and Spanish banks.

A failure by one or more of these big banks would tend to have a cascade effect. The ailing Spanish bank, Bankia, is currently being bailed out by the Spanish government. It is unclear yet whether it is the start of such a cascade or not. DB may not be at the forefront of the cascade, but it will assuredly get hurt badly in future months as this situation unfolds. It is far too invested in the PIIGS for this not to happen. I picked Deutsche Bank because it still has a high stock price. I was not able to short it when I tried. However, you can still buy put option on DB. You can also sell it if you own it. It might be wise to do both at this time. It does look almost ready for a bounce, but this whole EU financial fiasco also looks ready to implode at any time. I would consider buying some long term puts on DB. Put options for either the end of the summer or perhaps Jan. of 2013 look appealing. Remember a number of U.S. tax breaks are set to roll off at the end of this year. Plus the EU recession could deepen in the fall. The US might even join the EU in recession. Then the bottom might really fall out of stocks, not just EU bank stocks. For now, I might lean toward puts for the end of this summer. It is too hard to determine what QE measures, etc. will be employed. A put spread may help to keep down the cost of the options, even if it does limit your profits. Nothing is a sure thing.

The downtrend since mid-March is especially strong. It leaves little doubt as to the overall direction the stock is likely to take. When you look at other major European bank charts such as Spanish banks Banco Santander (STD) and Banco Bilbao Vizcaya Argentaria (NYSE:BBVA), or Italian banks such as Intesa Sanpaolo (OTCPK:ISNPY) and Unicredit (OTCPK:UNCFF), you realize just how serious and how significant this downtrend is.

If you take a look at the exposure for many of these other banks, the picture is the same or sometimes much worse than that of DB. At the time of the stress tests, these banks all had significant PIIGS credit exposure. STD had $567.20B in PIIGS exposure. This is 1060% of its market cap of $53.50B. BBVA had $552.90B in PIIGS exposure. This is 1834% of its market cap of $30.15B. ISNPY.PK had $606.03B in PIIGS exposure. This is 2975% of its market cap of $20.37B. UNCFF.PK had $541.54B in PIIGS exposure. This is 9179% of its market cap of $5.90B. These banks are so "at risk" it boggles the imagination. This tells one that the danger to the EU financial system is extreme.

Good luck trading.

Source: Deutsche Bank Is A Sell On PIIGS Exposure