LINGERING concerns over the health of Deutsche Bank whose shares hit a record low last Thursday is not expected to have a significant impact on the market here but the situation bears watching for any spillover effects later.
“While there will be concerns over the contagion effect on Asian banks, a real escalation of counter party risks (that the other party to an agreement will default) is not likely to be too significant,” said Thomas Yong, CEO, Fortress Capital.
“I have not really seen any spillover effects,’’ said Vincent Khoo, head of research, UOBKayhian.
Counter party risks is something to watch for.
“It is all about counter party risks,” said Pong Teng Siew, head of research, Inter-Pacific Securities. “The banks net out their exposures and present a picture of relatively low risk.
“But if a big counter party such as Deutsche Bank falls and cannot meet its commitments to other banks, then each bank’s net exposure transforms into gross exposure.
“The risk picture dramatically changes to one of a very huge risk. This is not to imply that Deutsche Bank will fall. If a big bank does fall, it will set off a chain reaction like dominos and it is then deemed too big to be allowed to fail,’’ said Pong.
Deutsche Bank has reserves of 215 billion euros and is reported to be negotiating for a lower fine of US$5.4bil instead of US14bil for misselling mortgage-backed securities. By Friday, the stock had recouped all its losses following the speculation of a lower settlement.
However, the confidence issue will likely remain for some time. Some hedge funds were earlier reported to be selling out of the stock. Deutsche Bank is smaller in market capitalisation, at nearly US$18bil, than its US peers like Bank of America at US$155bil, or Citi at US$133bil.
However, it has significant trading relationships with all the world’s largest financial institutions and a potential breakdown at Deutsche Bank makes it a bigger risk to the wider financial system than any other global bank, said Reuters, quoting the International Monetary Fund.
The confidence issue may not be confined to Deutsche Bank alone. “With the rise in suspicion about the ability of other banks to repay US dollar and interbank short term loans, the cost of US dollar loans which may often be collaterised against some safe assets, appears to have spiked last week.
“It should die down; if it slips only slightly lower and then, rises again, there is clear suggestion of trouble ahead,’’ said Pong.
If such a situation emerges, it would appear that there is lingering suspicion among banks about each others’ ability to repay, added Pong.
Thus, the ramifications arising from troubles in a big and globally interconnected bank is certainly not to be taken lightly.
The surprise and modest cut in oil output by some Organisation of Petroleum Exporting Countries (Opec) members has not led to a bullish but a mildly positive to neutral outlook on oil stocks.
While there are many details to be ironed out at next month’s Opec meeting, the concern is that cartel agreements like these may give rise to cheating.
“Iraq had immediately questioned the wisdom of the decision,’’ noted Pong, adding that those who break cartel agreements typically benefit while those who adhere take the hit.
It depends on how the production cuts are sustained by all the Opec members, said Yong.
Interest in oil stocks may be sustained for a month, said Chris Eng, head of research, Etiqa Insurance & Takaful.
“Then, the actual Opec meeting at the end of next month will get closer and there could be some scepticism on whether Opec members will actually deliver the cuts,’’ said Eng.
Khoo sees no major drivers for oil stocks, at this juncture. As for the impact on oil price, the news of a cut in output may provide technical and sentiment support, said Suhaimi Illias, group chief economist, Maybank Investment Bank.
“The involvement of non-Opec members like Russia will be necessary and add credibility to the deal struck,’’ said Suhaimi, maintaining the forecast for oil price at US$42.50 per barrel this year, and US$50 per barrel next year.
Ultimately, the return to a sustainable oil price recovery will require the balancing of excess supply and sustained demand, said Lee Heng Guie, executive director, Socio Economic Research Centre.
Lee expects oil price at US$45-US$55 per barrel for end of 2016 and 2017.
For such a powerful oil cartel to fully function, involvement of all members and important non-members is crucial.
The current situation is such that three OPEC members – Iran, Nigeria and Libya – are exempt from the production cut while clear commitment has yet to be forthcoming from Russia, a major non-Opec member.
As it is, it looks like a desperate move by Saudi Arabia, the prime mover of the deal, to see some improvement in oil price.
The Saudis’ threshold of pain appears to be two years when it targeted market share instead of high prices, and now it is trying to hammer out a modest deal to cut output as it reels from the shock of low oil prices.
Columnist Yap Leng Kuen reckons it is never too late to realize one’s mistake although that has been at a very high cost.