Why Deutsche Bank is rocking the markets
What happened to Deutsche Bank on the stock exchange. Facts, numbers and analysis
Deutsche Bank after Credit Suisse?
This is the question that is half-mouthed in Europe after what happened on Friday 24 March. But the alarm, according to some economists, is exaggerated.
Let's see facts, numbers and analysis.
BANKING CRISIS IN EUROPE?
The banking crisis is not over – after the European case of Credit Suisse with the controversial UBS operation – and it penalizes the Stock Exchanges, all of which fell sharply yesterday (-2.23% in Milan). The protagonist was Deutsche Bank, which announced the early redemption of a 1.5 billion Tier 2 bond. The news was greeted by a 15% drop in the stock, which limited the deficit in the evening (it closed at minus 8.6%). The reflection on European stock markets is heavy, with the fear of systemic risk in the banking sector after the cases of Silicon Valley Bank and Credit Suisse, whose merger with Ubs has also increased tension on the derivatives market, summarizes today the Sole 24 ore .
WHAT HAPPENED ON THE STOCK EXCHANGE AT DEUTSCHE BANK
The Frankfurt stock market woke up worried yesterday and Deutsche Bank's decision to repay in advance a 1.5 billion euro Additional tier 2 subordinated bond maturing in 2028 – a move usually intended to give investors confidence – was been seen as a sign of weakness. Result: the credit default swaps of the German institution, instruments to protect bondholders from bankruptcy, reached 203 basis points, triggering a shower of sales.
HOW MUCH HAS IT LOST IN THE DEUTSCHE BANK STOCK EXCHANGE
The stock lost up to 11%, closing at -8.73 euros and burning about 2 billion of capitalization, followed by Commerzbank: -6.5% to 8.8 euros. Deutsche Bank is one of the 30 world banks considered systemic , 2015-18 woes are behind us, profitability is strong (5.7 billion net profit in 2022), capital ratios are robust (13.4% Cet1 ratio), cash coverage ratio is 142% , 64 billion above the threshold set by the European supervisory authorities.
DEUTSCHE BANK REPORTS
In fact, Morgan Stanley recommended focusing on the bank's fundamentals while Citi spoke of the "consequence of an irrational market". The stock plummeted. Traders also note that Deutsche Bank is feeling the general pressure on banks' equity-linked debt since Credit Suisse canceled 16 billion Swiss francs of AT1 bonds as part of its bailout by of Ubs. The impact of the Credit Suisse devaluation at this point raises questions about an important part of bank financing, the Corriere della sera remarked.
UNICREDIT'S MOVE
Also yesterday Reuters revealed Unicredit's intention to repurchase a 1.25 billion Additional tier 1 perpetual bond. In total, the bank has issued 6.1 billion and is awaiting ECB authorization to exercise the buyback on 3 June. The institute led by CEO Andrea Orcel – also grappling with a controversy over its compensation – has ample liquidity and capital well beyond the levels required by regulators. Monetary institutions and heads of state then took the field, as with Credit Suisse .
THE WORDS OF LAGARDE
"The eurozone banking sector is resilient because it has solid positions in terms of capital and liquidity," ECB president Christine Lagarde stressed to the Eurogroup in Brussels. Our "toolbox" allows us to face the risks that weigh on both of us». As regards financial stability, he concluded, "the ECB has the necessary tools to provide liquidity to the financial system in the euro area, if necessary". German Chancellor Olaf Scholz assured: "Deutsche Bank is a very profitable bank. There's no reason to worry."
THE (NAIVE) COMMENT OF THE ECONOMIST EICHENGREEN
“The Deutsche Bank story seems fascinating to me. The stock market crash occurred in the absence of any new news. It is as if investors had woken up with a shock: everyone, sell Deutsche Bank, for heaven's sake". Barry Eichengreen, Berkeley economist and former consultant to the IMF, affirms this – somewhat naively – to La Repubblica . What happened therefore can be interpreted “as a generalized and irrational crisis of confidence in the banks. At this point, no one can be said to be calm. Of course, there are those that run more risk starting with the Americans, but not only those, which still have important investments outstanding in Treasury bonds that are not suitably 'covered' and therefore equivalent to latent losses. Added to this are supervisory and management shortcomings. I repeat, the problem does not only concern American banks, as we saw yesterday. It's like an Agatha Christie thriller: when a new crisis breaks out, it will be an open hunt for the culprit. The usual suspects are many: the managers, the controllers, the rating agencies”. With respect to possible similarities between the Credit Suisse and Deutsche Bank cases, they “all go back to the past. Even the German institute has had problems of bad management, imbalances between balance sheet assets and liabilities, clumsy investments that have led to capitalization and liquidity problems: however, it is all outdated stuff, which now seems to have been resolved. This is what is fascinating, let's say surprising: seeing traders speculate against a bank based on such superficial affinities, as if they didn't live in reality".
FUBINI'S ANALYSIS (CORRIERE DELLA SERA)
Less surprised by the attack on Deutsche Nak was the analysis by Federico Fubini, deputy editor of Corriere della Sera and economics editor of the newspaper directed by Luciano Fontana: "The zeroing of Credit Suisse's subordinated and convertible bonds last weekend raised for all European banks the yields to be offered to investors in order to be able to issue new ones. Soon the market focused on who should do it soon: two fragile German local banks, Deutsche Pfandbriefbank and Aareal Bank, had their bonds due. Since the two would in any case have had to refinance themselves by issuing other securities of the same type (the so-called "coco"), some American hedge funds predicted that the two would have taken another route: instead of repaying the holders, they would have transformed the securities into perpetual bonds (it was still legal). And that's what they did, because the cost to them was still less. It wasn't the first time those two very small banks had done this. But, with Credit Suisse's bond wound still open, some US hedge funds realized that move would scare the market. For this they have targeted Deutsche Bank, predicting that the tension would be unloaded on its stocks. Hedge funds built short positions on Germany's largest bank Thursday, to profit by selling its shares without owning them. Also on Thursday, they started buying "credit default swaps" (CDS) of Deutsche itself, the price of which soared (see yesterday's "Corriere"). CDS are derivatives against default similar to company life insurance policies, but with one difference: it is possible to buy those derivatives without owning the company's securities, somewhat as if one could insure oneself on the life of another. When the jitters about German bank coco spread, the jackpot hit for hedge funds. They gained from the rise in the price of Deutsche's default insurance derivatives (in part caused by them). Then they also gained from the collapse of the share of the large German bank, when the market thought it understood from the CDS that someone feared the bankruptcy of Deutsche itself”.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/perche-deutsche-bank-barcolla-sui-mercati/ on Sat, 25 Mar 2023 09:26:39 +0000.