By Amanda Cooper, Sruthi Shankar and Amruta Khandekar (Reuters) – Banking stocks fell again on Friday, with shares in German giant Deutsche Bank knocked by worries that regulators and central banks have not yet contained the worst shock to the sector since the 2008 global financial crisis. Wider indicators of financial market stress were also […]
Banking stocks slide as global investors seek safer shores
By Amanda Cooper, Sruthi Shankar and Amruta Khandekar
(Reuters) – Banking stocks fell again on Friday, with shares in German giant Deutsche Bank knocked by worries that regulators and central banks have not yet contained the worst shock to the sector since the 2008 global financial crisis.
Wider indicators of financial market stress were also flashing, with the euro falling against the dollar, bond yields sinking and the costs of insuring against bank defaults surging despite efforts by policymakers worldwide to reassure investors.
While the index of top European banks fell 3.5%, most major U.S. lenders fared slightly better, with JPMorgan Chase & Co, Citigroup and Bank of America down between 1% and 2%.
U.S. regional lenders such as First Republic Bank, PacWest Bancorp, Western Alliance Bancorp and Truist Financial Corp were also between 1% and 2% lower.
“Underlying sentiment is still cautious and in this environment no one wants to go into the weekend risk-on,” said Nordea chief analyst Jan von Gerich.
“It’s very volatile and it’s too early to say things will calm down.”
European banks’ Additional Tier 1 (AT1) debt – a $275 billion market which was plunged into the investor spotlight during the rescue of Credit Suisse AG – also came under further selling pressure.
These bonds can be written off during rescues to prevent the costs of bailouts falling onto taxpayers.
“The developments in the AT1 market mean 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,” said Peter Garnry, head of equity strategy at Saxo Bank.
Investors were looking to see how far U.S. authorities would go to shore up the banking sector, particularly the fragile regional lenders, after the collapses of Silicon Valley Bank (SVB) and Signature Bank earlier this month.
Amid the market volatility, European policymakers voiced support for their continent’s banks, with German Chancellor Olaf Scholz, French President Emmanuel Macron and European Central Bank chief Christine Lagarde all saying the system was stable.
Their backing came as Deutsche Bank shares dropped more than 12% alongside a sharp jump in the cost of insuring its bonds against the risk of default.
Shares in Germany’s largest bank have lost a fifth of their value so far this month and the cost of its five-year credit default swaps (CDS) – a form of insurance for bondholders – jumped to a four-year high on Friday, based on data from S&P Market Intelligence.
“Deutsche is a bank that has had its own issues with regulators, it has also seen profit volatility and gone through a restructuring,” said Paul van der Westhuizen, senior strategist at Rabobank.
“There is a fundamental difference in that Deutsche has returned to profitability over the last few quarters, whereas Credit Suisse did not have a profitable outlook for 2023 at all,” he added.
JPMorgan analysts also said that the Deutsche Bank share drop was not a reflection of the fundamentals of the bank.
“We are not concerned today about counterparty, liquidity issues” with Deutsche, the analysts wrote on Friday.
Deutsche Bank declined to comment.
(Graphic: CDS surge on banking sector turmoil – https://fingfx.thomsonreuters.com/gfx/mkt/znpnblnyypl/Pasted%20image%201679658468291.png)
Policymakers have stressed the turmoil is different from the global financial crisis 15 years ago, saying banks are better capitalised and funds more easily available.
But the worries spread quickly, and on Sunday UBS was rushed into taking over Credit Suisse after its Swiss rival lost the confidence of investors.
Swiss authorities and UBS are racing to close the takeover within as little as a month, according to two sources with knowledge of the plans.
Separate sources told Reuters that UBS has promised retention packages to Credit Suisse wealth management staff in Asia to stem a talent exodus.
Brokerage group Jefferies said the deal would change an equity story for UBS which was based on a lower risk profile, organic growth and high capital returns.
“All these elements, which is what UBS shareholders bought into, are gone, likely for years,” it said.
UBS shares were down 5% on Friday and its five-year CDS shot up 14 basis points.
(Graphic: Over $95 billion in market value wiped out in 2 weeks – https://www.reuters.com/graphics/GLOBAL-BANKS/USA/myvmobkeovr/graphic.jpg)
The way Credit Suisse was rescued has also ignited broader worries about investors’ exposure to the banking sector. The decision to prioritise shareholders over AT1 bondholders rattled this sector of the bond market.
As part of the deal with UBS, the Swiss regulator determined that Credit Suisse’s AT1 bonds with a notional value of $17 billion would be wiped out, stunning global credit markets.
Although authorities in Europe and Asia have said this week they would continue to impose losses on shareholders before bondholders, unease has lingered.
Deutsche Bank and UBS AT1s were down around 6 and 2.5 cents in price, respectively, on Friday, according to Tradeweb data.
(Graphic: Regional banks’ market value wiped out – https://fingfx.thomsonreuters.com/gfx/ce/lbpggjzgdpq/Pasted%20image%201679594672058.png)
(Reporting by Reuters bureaus; Writing Toby Chopra; Editing by Jason Neely, Catherine Evans and Alexander Smith)
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