Deutsche Bank Tumbles As Jittery Investors Seek Safer Shores

Deutsche Bank Tumbles As Jittery Investors Seek Safer Shores


Deutsche Bank tumbles as jittery investors seek safer shores

Germany's biggest bank Deutsche Bank saw its shares decline sharply as investors sought safer havens following recent bank collapses and takeovers that caused market turmoil. Shares fell to their lowest level in three years and the cost of insuring its bonds against default surged significantly.

The German lender is one of 30 banks globally deemed significant, meaning international regulations require it to maintain higher capital reserves in order to safeguard its assets should it fail.

Shares plunged 14%

Friday morning, shares in Germany's largest lender took a significant hit as investors sought safer havens following an uptick in debt insurance costs. Their shares initially fell as much as 14% but later recovered to trade at 8.54 euros ($9.12).

This month, the bank's share price has declined nearly 5%. Furthermore, its bond yields have seen an uptick.

On Friday, credit default swaps linked to Deutsche Bank's bonds surged, pushing up the cost of insurance. This caused a fresh sell-off in stocks on the platform.

Deutsche Bank shares experienced a sharp decline of up to 14% on the Frankfurt Stock Exchange, while their US-listed shares fell by 7%.

On Friday, European shares in major banks such as Commerzbank, Societe Generale and Austria's Raiffeisen fell sharply, contributing to a general decline across the region. The DAX index, which tracks 30 large European banks, fell 2.2% to its lowest level in almost two months amid concerns about the stability of the banking industry.

Investors remain wary of the wider financial sector after recent failures at Silicon Valley Bank and Signature Bank in America, as well as Swiss bank Credit Suisse's hasty rescue by UBS. They want to ensure that any other banking crisis does not spread throughout the economy and cause a recession.

Other major German banks, including Commerzbank and BNP Paribas, also suffered significant losses. In Britain, Standard Chartered was the biggest loser on the FTSE 100 with its shares down 6%.

According to Russ Mould, investment director at AJ Bell, the fall in Deutsche Bank's share price reflected fears over an expanding crisis within the banking industry. He noted that both parties experienced a loss of confidence as a result of this decrease.

He predicted the Federal Reserve would likely refrain from cutting interest rates again due to the panic-ridden nature of lending and slowdowns in economic activity. Instead, central bankers are expected to maintain their policy of raising borrowing costs as they did in February and March in order to quell fears of another potential downturn.

Its credit default swaps soared

Credit default swaps, a form of insurance for bondholders against the collapse of a company's debt, hit their highest levels since November. These rates could signal that concerns about global bank stability remain.

On Friday morning, shares of European lenders Deutsche Bank and Societe Generale experienced a sharp decline. The former fell 14% at the market open while the latter lost 7%. Investors became nervous about their assets after Credit Suisse's fire sale to rival UBS Group last week and the collapse of Silicon Valley Bank in the United States.

The turmoil on Wall Street and in Europe has left investors searching for the next weak link in banking as the global financial system unravels. That has driven credit default swap prices on JPMorgan Chase & Co, Bank of America Corp, Morgan Stanley and Wells Fargo to their highest levels since October.

On Thursday night, credit spreads - which measure the cost of insuring bonds against default - surged to 173 basis points from 142 the day before. This marked the biggest one-day rise in credit default swaps since 2008 crisis that ignited global financial panic.

Lance Roberts, chief investment strategist at RIA Advisors in New York, noted that credit default spreads have often been an indicator of underlying issues, particularly when they reach their highest points. He speculated that the increase was likely caused by investors seeking to protect themselves against losses similar to those suffered by holders of Credit Suisse bonds not included in the rescue deal.

Investors have taken notice of Deutsche Bank's decision to pay back a $1.5 billion loan ahead of its maturity date. This move may indicate the lender's concern about the state of the banking sector, but it wasn't necessarily caused by recent events, according to Jonas Goltermann, senior analyst at Capital Economics in London.

Another concerning development was an uptick in the price of Deutsche Bank's debt-default swaps, which have reached their highest level since 2020. Its five-year CDS rate surged to 31 basis points - a new high for this instrument.

Its bond yields rose

German bank Deutsche Bank experienced a sharp decline as investors sought safer havens following the collapses of Silicon Valley Bank and Credit Suisse in America, as well as Swiss bank Credit Suisse's forced fire sale to rival UBS. This crisis in finance has further rippled world markets, with the euro depreciating against the dollar and insurance costs rising for those insured against bank defaults increasing.

On Thursday, Deutsche's bond yields hit their highest since July 2011 as the European Central Bank increased interest rates by half a percentage point and stirred concerns about inflation and its potential to undermine financial stability. Christine Lagarde of the ECB said that euro zone banking sector remains resilient and an essential pillar in combatting high prices, while Olli Rehn of Finland's central bank warned against monetary fragmentation across the region.

The European Central Bank's rate rise was its biggest in almost seven years, as it sought to keep policy tightened amid a record rise in consumer prices that has caused some central banks to scale back on rate increases. This latest move came after the ECB had already raised rates twice this winter - once in December and January - amid efforts to combat inflation.

Some analysts had anticipated the ECB would scale back on its rate increases, yet recent turmoil in the global banking system, including Credit Suisse's collapse, has fuelled concern about its effects on the euro zone's economy. The euro fell against the dollar and government bond yields across the region declined sharply despite assurances from policymakers that Europe's banking system remains secure.

However, the ECB indicated it is prepared to intervene if necessary in order to prevent a widening of the spread between core and peripheral bond yields that could disrupt monetary policy transmission across the euro area. They have stated they were "monitoring current market tensions closely."

But the ECB's actions have so far allayed fears that higher interest rates would cause a run on bonds, thus increasing liquidity. Analysts anticipate the ECB to remain hawkish and its 10-year Bund yield could reach 2% within the coming months.

Its profit slumped

The German bank's profit declined sharply in the fourth quarter, as it repaid subordinated bonds prematurely and investors worried that this latest shock to the banking sector would spread. Its shares fell for a third day straight - their steepest drop in over three years - as investors became concerned.

By midday in Europe, the bank's share price had declined 2.4% as analysts assessed uncertainty surrounding the macroeconomic outlook. Although its full-year net profit surged 169% to 5 billion euros, this amount fell short of analysts' expectations.

It also revealed a weaker-than-expected revenue result from its investment bank. Total revenues at this division fell 13%, while its contribution to core bank pre-tax profit declined by 6%.

Deutsche Bank's total profits for the fourth quarter were better than expected. The lender reported a 2% rise in net income compared to their fourth-quarter rise of 4.7%. This result was driven by an ambitious restructuring plan they unveiled in 2019 that sought to reduce costs and boost profitability.

Analysts reported mixed results for Deutsche Bank in the fourth quarter. Overall revenue was higher than expected and core banking pre-tax profit rose 7% to 3.5 billion euros, but Amit Goel, co-head of European banks equity research at Barclays, commented that these numbers were "weaker than expected."

On Friday, Deutsche Bank faced mounting worries due to an increase in credit default swaps and rising bond yields due to investors' fears about a bank's ability to repay debt. According to S&P Market Intelligence data, its five-year CDS hit an all-time high.

Meanwhile, the euro weakened and bond yields rose, fueling concerns about Europe's financial stability as investors demanded more government intervention to safeguard banks. Authorities had hoped that Credit Suisse's emergency rescue by Swiss regulators last weekend would provide some respite from jittery investors.

Markets remained skeptical and the cost of insuring UBS Group AG's additional tier-one bonds surged from 6.5 billion Swiss francs to 16 billion francs, leaving investors uncertain whether this takeover was sufficient to restore faith in the banking sector.

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