Friday, February 23, 2024

Will Deutsche Bank be the next Credit Suisse? Here are a few warning signs

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A few telltale signs emerged against Deutsche Bank on Friday, which reminded investors of a similar story unfolding for Credit Suisse that ultimately led to its takeover by UBS.

Deutsche Bank shares tumbled on Friday after the cost of insuring the bank’s debt against the risk of default shot to more than four-year highs, highlighting concerns among investors about the stability of Europe’s banks.

The region’s banking sector has had a rough ride in the last week, with a state-backed rescue of Credit Suisse and turmoil among regional US banks fuelling concerns about the health of the global banking sector.

Deutsche shares, which have lost more than a fifth of their value so far this month, fell by as much as 14.9% on Friday to their lowest in five months. The shares were last down 13% at 8.13 euros ($9.16). Deutsche Bank’s credit default swaps (CDS) – a form of insurance for bondholders – shot up above 220 basis points (bps) – the most since late 2018 – from 142 bps just two days ago, based on data from S&P Market Intelligence.

Germany’s largest bank has seen $3 billion wiped off its market value in the space of just week.

Earlier this month, the cost of insuring the debt of Credit Suisse against default rose, while shares in the Swiss lender fell to record lows.

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However, the research firm Autonomous said in a report on Friday that Deutsche Bank is in “robust shape” and “not the next Credit Suisse”.

“We have no concerns about Deutsche’s viability or asset marks. To be crystal clear – Deutsche is NOT the next Credit Suisse,” the report said.

Some of Deutsche Bank’s bonds, meanwhile, sold off too. Its 7.5% Additional Tier-1 dollar bonds fell nearly 6 cents to 70.054 cents on the dollar, pushing the yield up to 27%. That yield is almost triple what it was just two weeks ago, based on Tradeweb data.

AT1s issued by banks have come under pressure since Credit Suisse was forced to write down $17 billion of its AT1s as part of a forced takeover by UBS at the weekend.

European Central Bank head Christine Lagarde told EU leaders euro zone banks were resilient because they have strong capital and liquidity positions, but that the ECB could provide liquidity if needed, EU officials said on Friday.

With inputs from Reuters

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