Kitchen sinking

This morning saw a bit of conventional “wisdom” turned on its head. A German bank reporting numbers that were far worse than a Spanish banks. 

Deutsche bank released Q4 numbers this a.m and swung from a profit last year to absorbing a EU2.2bln loss due to onerus write downs  on the flipside Santander the Spanish banking giant still managed to eek out a profit of EU2bln after putting aside approx EU12bln for provisions against bad loans. 

Looking at the German banks numbers I cant help but feel this is a process known as kitchen sinking. Get all the bad news out there and take the hit in the short term to try and beat the next set of numbers. Backed up by the fact that this is the first set of annual earnings posted by the new top management since taking over in June. Often done by companies after a leadership handover where the new CEO will “kitchen sink” it, i.e throw in all the bad numbers and problems early on so as to distance himself from the issue and pave the road for upside in the future. Analysts had been guided towards a poor set of numbers but it appears that there was confusion as to how bad and it looks to me like the new CEO just threw it all out there. 

The road ahead will now be a bit clearer as he has re-based people expectations and hopefully they will be no more skeletons in the closet to come out to hit earnings over the coming quarters. There is still an overhang on German banking as Bafin the German regulator is studying the sector to establish if they have a too big to fail issue on there hands (which they probably do) but as long as the big players work to keep their capital ratios in line I can see this fade away in the future.

I’m probably not alone in thinking this as the stock has held up quite well today so far, just worth noting a neat little trick that new CEO’s often pull to make their job a tad easier in the future.

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