Deutsche Bank Shares Tumble, Fueling Banking Crisis Concern

Deutsche Bank Shares Tumble, Fueling Banking Crisis Concern
A general view outside the Deutsche Bank building in central London in London, England on July 8, 2019. (Leon Neal/Getty Images)
Andrew Moran

Deutsche Bank shares tumbled as much as 16 percent on March 24 after the cost of insuring the financial institution’s debt against default risks increased to the highest levels in about four years.

The Frankfurt-listed stock later trimmed its losses to close 8.5 percent lower.

The company’s five-year credit default swaps (CDS), a type of default insurance for bondholders, surged above 220 basis points, up from 142 basis points earlier in the week; it’s the largest jump since the end of 2018. Despite the recent concerns, Deutsche CDSs are below their 300-basis-point record that occurred in 2011 during the eurozone debt crisis.

The higher CDS values go, the greater the odds the market sees the issuer defaulting.

Germany’s largest bank has recently eliminated $3 billion from its market value as its Frankfurt-listed shares have been sliding for three consecutive sessions.

The panic in Deutsche Bank has spread to the broader banking sector. The iShares MSCI Europe Financials ETF and the Financial Select Sector SPDR Fund each tumbled more than 1 percent on March 24.

Deutsche Bank also witnessed its Additional-Tier 1 (AT1) bonds slump in recent sessions. These instruments, which were crafted in the wake of the 2007–2009 financial crisis, convert bonds into equity when a lender faces difficulties, with the idea of absorbing losses should capital ratios slip below the listed threshold.

In the wake of Credit Suisse’s near failure, which saw Swiss regulators eliminate the bank’s AT1 debtholders, global financial markets have been paying closer attention to these so-called contingent convertibles (CoCo).

The logo of Deutsche Bank is seen on one of their branches in Frankfurt am Main, western Germany, on Feb. 4, 2021. (Armando Babani/AFP via Getty Images)
The logo of Deutsche Bank is seen on one of their branches in Frankfurt am Main, western Germany, on Feb. 4, 2021. (Armando Babani/AFP via Getty Images)

ING analysts believe that it will be challenging for other banks to begin issuing fresh AT1 bonds.

“It is doubtful that banks will be able to issue new AT1 anytime soon, increasing the likelihood of outstanding AT1 notes being extended,” wrote several ING economists and analysts, including James Knightley, the chief international economist, in a research note.

“We consider that the recent events in the banking sector have resulted in substantially increased uncertainty, which is likely to continue to be reflected as substantial short-term volatility in credit markets. We expect bank spreads to be negatively impacted in general and also in the longer term, whether in bank capital or in bank senior debt, as bank investors factor in more uncertainty regarding resolution practices.”

Deutsche’s 7.5 percent AT1 dollar bonds tumbled about 2 cents on March 23. The Invesco AT1 Capital Bond UCITS ETF AT1, which invests in these CoCos, declined as much as 4 percent on the London Stock Exchange (LSE) at the end of the trading week.

At the same time, a tier 2 subordinated bond climbed to face value after Deutsche suddenly redeemed the note early.

The global bond market also slid on March 24.

The U.S. benchmark 10-year yield fell nearly 4 basis points to below 3.39 percent. The U.K. 10-year yield slumped close to 9 basis points to nearly 3.27 percent. The 10-year German bond dropped 8 basis points to under 2.11 percent.

Another Credit Suisse Moment?

At this stage, investors are concerned about the health of Deutsche Bank.

But are these fears justified?

“We have no concerns about Deutsche’s viability or asset marks. To be crystal clear - Deutsche is NOT the next Credit Suisse,” a report from research firm Autonomous reads. “Judging from the movements in Deutsche’s CDS, AT1s and share price, investors are worrying about the health of the bank. We are relatively relaxed in view of Deutsche’s robust capital and liquidity positions.”

Deutsche Bank has reported 10 consecutive quarters of profit, including a $1.98 billion net profit in the fourth quarter, driven by a 159 percent year-over-year gain in its annual net income.

Deutsche Bank presently has $1.4 trillion in assets, with $880 billion in assets under management.

The company has been undergoing a thorough restructuring plan that started in 2019, with CEO Christian Sewing saying that the entity has been “successfully transformed” in the past three years.

“By refocusing our business around core strengths we have become significantly more profitable, better balanced and more cost-efficient. In 2022, we demonstrated this by delivering our best results for fifteen years,” Sewing said in a statement in February.

As the panic spreads, some investors are wondering whether the German government will come to the rescue, as Swiss authorities did for Credit Suisse.

For now, that doesn’t appear to be the case, according to a recent statement from German Chancellor Olaf Scholz.

“Deutsche Bank has modernized and organized the way it works. It’s a very profitable bank. There is no reason to be concerned,” he said after a summit of European Union leaders.

The bank has endured a series of scandals in the past decade, which some experts say could be contributing to the selloff.

Between 2013 and 2015, U.S., British, and European regulators slapped the company with more than $3 billion in fines after it was discovered that traders had manipulated interest rates.
In 2015, Deutsche paid out $260 million in fines following the discovery by U.S. authorities that the bank violated a U.S. embargo on Iran.
It also was revealed in 2015 that Deutsche Bank used stock transactions to launder approximately $10 billion of dirty money in Russian rubles. As a result, the financial institution paid a $600 million penalty to the U.S. government.

Since going public in November 1996, Deutsche Bank shares have plummeted 70 percent.

Deutsche Bank officials didn’t respond by press time to requests by The Epoch Times for comment.

Andrew Moran has been writing about business, economics, and finance for more than a decade. He is the author of "The War on Cash."
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