Deposit Your Trust

Money Matters: Nov. 2009

Markets are receiving headwinds after racing ahead of fundamentals once again. In the meantime, Obama is struggling to keep the cork on the bonus bottle, limiting payments to top bank executives. The system is starting to get scary. Happy Halloween.

“Deposit Your Trust” is our topic this month. Which banks are still trustworthy? Where should you deposit your cash, besides your mattress? What alternatives can a savvy investor consider? Is there a solution?

Until Dec. 31, 2009 the state guarantee is unlimited for valid deposits. This guarantee will be reduced at the beginning of next year to €100,000 per deposit. The interest rate remains at the lowest level in years at 1.00%, set by the European Central Bank (EZB).

The main question for investors is the risk-reward analysis. Banks in Austria are offering between 0.125 to 1.25% interest for daily available cash and up to 3.5% for 5-year deposits.

A basic example, to highlight the risk an investor has to bear in mind: Imagine you go to deposit cash-on-hand of €250,000. The state guarantee from 2010 onwards is €100,000. Your personal default risk when depositing your money at a bank is thus €150,000 – a total 60% of your investment. The maximum return you can receive is 3.5% of €250,000, which would give you a payback of €6,562.50 p.a. (2.62%) on interest after deducting 25% tax.

Since June 1999, the “Basel II” concept of increasing banks’ equity-to-asset ratios has been in place, with no significant results to show. Banks in the U.S. have generously neglected this policy, which has lead to a “Bad Bank Celebration Day.” Investors are screaming for regulations, but it will take years until we will finally reach the minimum equity-to-asset ratio – a reserve level –  of 6% requested by Ewald Nowotny, Governor of the Austrian National Bank (OeNB).

Luckily, there are several ways to bypass sleepless nights and avoid having to fill your mattress with small change and euro notes.

One solution is to open a trading account with your bank and invest in the stock market. If you remember last month’s investment proposal, it mixed pharmaceutical, energy and financial stocks. Government bonds would be a solution for risk-averse investors, paying approximately 2.5% return p.a. This measure would secure your money in the event your bank goes bankrupt, as your trading account cannot be included in the legal estate.

For risk lovers, we suggest not depositing your cash at a bank, but buying shares in a bank. Deutsche Bank stock can be purchased below €50.00, paying out a fair dividend with 100% upside potential. Deutsche Bank CEO Josef Ackermann himself is currently on a shopping trip, buying Salomon Oppenheim for €1.3 billion. He will be one of the few to profit from this financial crisis. Raiffeisen Bank stock is available for purchase at €39.00/share, and the Erste Bank at €27.50.

This has been Richie Rich in the system, stay tuned for the year-end rally in December.

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