Carmignac's Medecin Likes CoCos, Just Not Deutsche Bank's

  • French asset manager favors Intensa Sanpaolo, Credit Suisse
  • Carmignac sees banks' return on equity staying under pressure

Carmignac Gestion SA likes the riskiest European bank debt known as contingent convertible bonds, said Jean Medecin, a member of the firm’s investment committee. He won’t be buying Deutsche Bank AG’s though, he said in an interview.

Carmignac, which oversees 52 billion euros ($59 billion) in assets, focuses on European bank bonds including CoCos sold by lenders with stable earnings, such as retail banks or wealth managers, Medecin said in an interview in Munich. A CoCos issuer should not be able to decide when it wants to convert the bonds into equity for it to appeal to Carmignac, according to Medecin. Neither applies to Deutsche Bank, he said.

“Corporate bonds of the European financial sector are currently a large exposure in our global strategy,” Medecin said. “We definitely prefer to sit on the credit side.” His company favors the CoCos of banks such as Intesa Sanpaolo SpA and Credit Suisse Group AG.

CoCos are the first debt securities to get hit if a bank runs into trouble. Coupon payments can be switched off and the principal on the bond may suffer losses if capital levels fall.

Deutsche Bank AG extended declines after Moody’s Investors Service signaled it may cut the German lender’s credit rating amid concern that it will struggle to restructure businesses.

Carmignac, founded in 1989, has about 25 percent of its assets in credit and roughly 15 percent in financial-sector credit, Medecin said. It doesn’t own shares in any European bank, he said.

Credit Side

“They are still in deleveraging and the return on equity will remain under pressure, so we definitely prefer to sit on the credit side,” Medecin said.

Deutsche Bank and Credit Suisse, Europe’s two biggest securities firms, replaced their top executives last year to spearhead plans to cut costs and reduce the focus on capital-intensive debt-trading businesses. The two banks are now focusing on different strategies. Credit Suisse is shrinking the investment bank and pivoting to wealth management and Asia, while Deutsche Bank is more focused on improving investment-banking returns.

European banking is probably the only industry in the world that’s still in the “de-risking and deleveraging phase,” Medecin said.

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