A German Bank Bet

Here at The Classical Liberals, we’re excited to bring you another brilliantly conceived investment opportunity. Last time it was Ukrainian energy efficiency; this time it’s German banks.

As part of the European Central Bank’s slow assumption of, “supervisory power over the region’s banks,” it will be conducting stress tests on the balance sheets of up to 124 banks. According to @carstenbrzeski, Germany’s financial sector is “over-banked”, and:

“There are too many banks in Germany,” Brzeski says, suggesting that the upcoming ECB tests could provide an opportunity for a consolidation of the sector.

If I were a hedge fun with money to spare (perhaps a sudden influx of assets from, say, former SAC clients?), and I also wanted to take my advice from a graduate student with no professional experience in the asset management business, I would consider three possible plays.

1. Buy shares of the most attractive smaller, regional German banks, betting on their eventual acquisition at a slight premium.
2. Buy shares of the most attractive larger German banks (or perhaps non-German banks seeking more German exposure) , betting that they will make accretive acquisitions of the smaller, regional banks in question
3. Short potential acquirers, betting that they’ll completely blow it and wind up saddled with a bunch of non-performing loans in the shipping industry.*

*According to Spiegel:

“I think shipping loans is a higher risk area for a number of German banks, and as in previous stress tests one of the key challenges will be the comparatively low level of Basel III core Tier 1 [capital ratios above 7 percent] as a starting point,” notes Jon Peace, a Nomura analyst. Other German banks with high shipping exposures are two of the publicly-owned Landesbanken, or regional banks, including NHS Nordbank and Norddeutsche Landesbank.