Industry Updates

Deutsche Bank shares tumble as banking contagion fears spread

The German bank led losses across European banks on Friday

Theo Andrew

Deutsche Bank

Deutsche Bank shares tumbled on Friday morning leading losses across the European banks as investor concerns over the health of the financial sector intensified.

The German lender’s share price was down 14.2%, as of 11.16am on Friday morning, after its credit default swaps (CDSs) spiked to over 200 basis points (bps), up from 142bps on Thursday, taking its losses to 30.2% over the past two weeks.

The Euro Stoxx 600 Banks index fell 5.3% in the first hour and a half of trading with Germany’s Commerzbank down 10.3% while French banks Société Générale and BNP Paribas plummeted 8.3% and 6.5%, respectively. Finland’s Nordea Bank is down 8.5%.

The slide in Europe’s largest banks pulled the continent’s flagship indices down, with the FTSE falling 1.8%, while France’s CAC 40 and Germany’s Dax were down 2.2% and 2.1%, respectively.

It comes as global regulators have looked to boost investor confidence in the banking sector following a period of aggressive interest rate rises over the past 12 months.

US Treasury secretary Janet Yellen said yesterday that it would be “prepared to take additional actions if warranted” to secure bank deposits.

Banking stacks appeared to shake off contagion fears earlier this week after bank ETFs tumbled as much as 4% on Monday morning, however, a week of interest rate hikes has reignited contagion fears.

Central banks continued to raise interest rates this week, with the Federal Reserve increasing rates by 0.25% on Wednesday followed by the Bank of England a day later despite the impact that higher rates are having on the banking sector.

Last week, the European Central Bank hiked interest rates by 0.50%.

Deutsche Bank bonds have also sold off with its Additional Tier-1 (AT1) bonds falling three cents to 72.8 cents on the dollar, driving the yield up to 24%.

The asset class has come under pressure since UBS acquired its Swiss rival Credit Suisse last Sunday in a $3.25bn deal with Swiss regulator FINMA wiping out $17bn of Credit Suisse’s AT1 debt to zero, a move that angered bondholders.

According to Saxo Bank, the cracks in the AT1 bond market, which ranks bondholders above shareholders in the pecking order following bankruptcy proceedings is weighing on Europe’s banks.

“The developments in the AT1 market means that most European banks are incentivized at this point to issue common equity which is diluting for shareholders and also the reason why banking stocks are being reset lower,” Saxo Bank said in a note.

CoCo bond ETFs plummeted on the decision to write the banks AT1’s to zero, in what has been considered a death knell for the market, before rallying over the week. However, the Deutsche Bank sell-off has hit the ETFs again this morning, with the Invesco AT1 Capital Bond UCITS ETF (AT1) and the WisdomTree AT1 Coco Bond UCITS ETF (COCB) both down 4.1%.

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