Deutsche Bank’s digital return notes linked to Euro Stoxx Banks may outperform benchmark

By Emma Trincal

New York, Oct. 2 – Deutsche Bank AG, London Branch’s 0% digital return notes due Oct. 21, 2015 linked to the Euro Stoxx Banks index give investors a chance to outperform the underlying index on both the upside and downside if it trades within a 30% range, which a trader said is the expected band for this index.

If the index finishes at or above the initial level, the payout at maturity will be par plus the digital return of 14.9%, according to an FWP filing with the Securities and Exchange Commission.

If the index falls by 15% or less, the payout will be par. If the index falls by more than 15%, investors will be fully exposed to the decline.

“It’s pretty straightforward,” said Steve Doucette, financial adviser at Proctor Financial.

“The 15% barrier is neat because you get that 15% protection level.

“It’s a bet on the sector. You get 15% return on the upside.

“If you believe that the European banks sector will be up a little bit or down a little, you will outperform in either direction.”

The Euro Stoxx Banks index is one of the 19 subindexes of the Stoxx Europe 600 index. It currently includes 29 stocks of banks from the 12 largest euro zone countries.

Short and sweet

Doucette said the upside, while capped at the digital level, is still attractive.

“Fifteen percent for a one-year is not a bad return even if the market continues to run,” he said.

“The issue is that, as an equity substitute, you’re long the banking sector down beyond the barrier. If the market turns negative, you’ll be long the index.”

In his view, the risk is more on the downside than on the upside.

“Nobody is going to complain about a 15% return,” he said.

Despite a “good” structure, Doucette would not use the note because the product is linked to a sector index.

“I used to be bullish on the financial sector until 2008. This is one of the reasons I don’t do sector plays anymore,” he said.

“But if you have a strong conviction, if this note is in the sector you want to be in, it minimizes the downside risk and allows you to potentially outperform.

“I like the one-year note. It’s short and sweet. Overall, I think it has pretty favorable terms.

“A 15% upside, a 15% downside ... It has some outperformance characteristics as long as a market downturn is not too drastic.”

Within the range

Jim Delaney, head trader at Market Strategies Management, looked at the trade from a technical analysis standpoint.

“The chart will give you a lot of answers,” he said, focusing on the one-year chart.

“If you look at the past 12 months, the index closed early October at 129.68. It hit a high during the year in early April at 163.34. That’s a 26% gain right there. That’s a pretty wide range, but the index has gone sideways such as finishing the year up 11%.

“So it was up 26% for the first six months, but after the end of the one year, it only gained 11%. I’m thinking just looking at this this chart that the index is probably going to stay within that 30% range: 15% up, 15% down.”

In early August, the index hit another low at 135.67.

“From its high in April to the low in August, the index dropped 18%. That 15% pretty much encapsulates the expected move over the next year,” he said.

“I would be buying these notes because if the index goes up, or even stays flat, I get 15% and if it comes down to 15%, I just get zero.

“It’s skewed to the upside slightly with some good protection in what appears to be a sideways market with a wide range.

“If Europe moves more aggressively into QE, ultimately, it should be good for banks because people will start buying riskier assets ... and one of the riskiest assets is a bank stock.”

JPMorgan Chase Bank, NA and J.P. Morgan Securities LLC are the placement agents.

The notes will price Oct. 3 and settle Oct. 8.

The Cusip number is 25152RRE5.

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