NEW YORK (Reuters) – Hedge fund investor Doug Kass said on Wednesday that he is adding to his already large bank exposure in Citigroup Inc, JPMorgan Chase & Co, Bank of America Corp and Wells Fargo & Co as Deutsche Bank AG’s problems “will benefit large U.S. money center banks.”
Kass, who runs Seabreeze Partners Management, said he believes Deutsche Bank, whose shares fell to a year low overnight, is weighing on the banking sector as some investors are concerned about Deutsche Bank’s large derivative portfolio and its counterparty risk with U.S. money center banks.
“I view the current underperformance in banks stocks as an important intermediate-term opportunity to acquire valuable long term investments,” Kass said. “Deutsche Bank’s woes are actually a positive for U.S. money center banks that are rapidly gaining share in fixed-income trading and retail and corporate lending,” he said.
Kass characterizes Deutsche Bank as the “next Black Swan for the EU economy” as shares are down 40 percent year-to-date. “Deutsche Bank is the Sears Holdings of the global bank industry,” Kass said. Like Sears Holdings Co, Deutsche Bank has no current profits, is in a state of operating flux, is being forced to sell assets, has an extremely low equity capitalization and a large and leveraged balance sheet, Kass said.
“Consider that Deutsche Bank’s equity cap is only about $23 billion, compared to $170 billion for Citigroup – even though both have a comparable amount of assets on their balance sheet at $1.75 trillion,” Kass notes. Deutsche Bank generates less than $50 billion in revenue compared with Citigroup’s $65 billion.
By contrast, JPMorgan has $2.5 trillion in assets, $200 billion of equity and generates almost $100 billion of revenue, Kass said. “Reflecting operating losses and a toxic asset book of European loans and sovereign debt, Deutsche Bank trades at only one-third of overstated shareholders equity compared with Citigroup at 90 percent of shareholders equity and JPMorgan at 1.8 times capital,” he said.
But most disconcerting, Kass said, Deutsche Bank has an “opaque derivatives book – probably at about $40 trillion with an estimated net exposure of approximately $100 billion.”
“Deutsche Bank’s financial and operating woes as well as those of other equally challenged EU banks and concentration on cost savings instead of business building have and will continue to inure to the benefit of the large U.S. money center banks who stampede towards gains in corporate and retail market share as well as taking share in global fixed-income trading,” Kass said.
Reporting By Jennifer Ablan; Editing by Steve Orlofsky