Deal on Greece Prompts Worries for BNP, Deutsche Bank

After twelve hours of back-and-forth negotiating, European leaders have agreed to help Greece avoid a default by providing it with €130 billion ($172 billion). The Greeks won't hold onto that money for long, as it will go straight to Greece's creditors, most of whom are based in France and Germany. European banks BNP Paribas BNP and Deutsche Bank DB will be directly impacted beyond a larger bear market in Europe as investors react to the news. While the news brings some relief to markets that have dealt with an emotional rollercoaster from Europe as the market oscillated between pessimism and hope, it is far from a win for European debtholders in the short term. Alongside the agreement was a deal with private creditors, who will forgive 53.5 percent of their principal investment and exchange the remainder of their holdings in Greek debt for newly issued bonds. The new notes will have a 2 percent coupon until February 2015, 3 percent for the next five years, and a 4.3 thereafter until expiring in 2042. The new yields are extremely low because they reflect the security of the European Central Bank, which is backing the new notes through the recently-created European Financial Stability Facility. The EFSF currently has an Aaa rating with Moody's and an AA+ rating with Standard & Poor's. The bailout of Greece marks the third and largest so far move by the new group, after supporting Ireland with €17.7 billion and Portugal with €26 billion. However, Ireland has already considered asking the EFSF for further help, and Portugal may soon follow. Demand on the EFSF has made it attempt to expand, which was halted when Slovakia rejected the plan. The need for EFSF expansion and the large size of the Greek bailout suggest that Europe remains precarious. The funds to Greece account for 29.5 percent of the body's total borrowing power, and over half of what was left after Portgual was given its bailout. The EFSF may turn to European leaders and ask for its lending ability to be raised in the near term, especially if PIIGS economies turn to it asking for more. This is a likely scenario, which means that the Greek deal is a short-term win, but there are more battles to come. European lenders may be asked to take another haircut, which would hit earnings at the European banks. Deutsche Bank already saw profits fall by over €1 billion to a loss of €422 million. The company attributed the loss to "low client activity and significant litigation charges", which the bank attempted to offset by "lower compensation costs and other cost control measures in areas such as recruitment, marketing and travel." In other words, the bank can't afford its spendthrift ways. The market has forgiven DB, and the stock is flat since it reported the loss on February 2nd. BNP has fared much better, and is up over 6 percent in the past month as many analysts hold a buy rating on the stock thanks to its low price (its P/E is around 7 and it is trading below tangible book value. Goldman Sachs holds a €55 price target on the bank, thanks to the bank's aggressive deleveraging and lower risk profile, although Goldman analysts acknowledge that "lower than expected activity in capital markets" could hurt the company. With Deutsche Bank reporting a loss on low client activity, expectations for capital markets need to stay low.