U.S. bank stocks were taking a heavy hit in Friday trading following the sharp pullback in European financial equities, dragged down by the sell-off in Deutsche Bank.
Deutsche Bank’s U.S.-listed shares fell about 6% after the firm said Thursday that it will forgo an AT1 call this year, causing a spike on the cost of insuring the bank’s debt against failure.
Deutsche Bank’s credit-default swap (CDS) against subordinated notes increased to nearly 600 basis points, the highest level ever recorded for the company, suggesting an implied default risk of 25%.
The Swiss authorities’ decision last week to completely wipe out Credit Suisse Group AG AT1 debt holders dramatically impacted the AT1 market.
After the failure of multiple U.S. regional banks and the takeover of Credit Suisse by UBS Group AG, investors scrutinized the banks most exposed to the AT1 segment and the risk of runs on deposits.
The Bloomberg database shows that AT1 bonds together account for 17.7% of Deutsche Bank’s common equity tier one.
German Chancellor Olaf Scholz reacted to the collapse of Deutsche Bank shares, saying “there is no need to be concerned about Deutsche Bank” since the institution is profitable.
“It is doubtful that banks will be able to issue new AT1 anytime soon, increasing the likelihood of outstanding AT1 notes being extended,” according to the ING Groep global macro team.
“Refinancing an AT1 would be an extremely difficult exercise in the current market backdrop,” said Suvi Platerink Kosonen, banking credit analyst at ING.
Stuart Cole, head macroeconomist at Equiti Capital, said: “Deutsche Bank has been in the spotlight for a while now, similarly to how Credit Suisse had been. It has gone through various restructurings and changes of leadership in attempts to get it back on a solid footing but so far none of these efforts appear to have really worked.”
Adam Johnson, editor of the Bullseye Brief & Fox Business Contributor, said European banks are hard to own given the region’s credit quality and economy. Despite representing its nation’s name, like Credit Suisse, Deutsche Bank has fought for years to reclaim the prestige of its past, he said.
Andrew Coombs, head of EMEA Banks Sector at Citigroup, said the market is irrational, with the risk of domino effects amplified by media headlines, regardless of whether the initial reasoning was correct.
U.S. bank equities are trading down in Friday’s session, with indiscriminate losses across small and major institutions.
“Deutsche Bank is too big to fail. There’s not a chance in hell that the German government or the ECB would let a bank of Deutsche Bank’s size and prestige go down,” David Enrich, Editor of the New York Times Business Investigations, said of Deutsche Bank.
Enrich has state that the German bank “has been a problem child for a very long time now, and I think it’s a natural place when investors look for the next bank to go down after Credit Suisse.”
Produced in association with Benzinga
