Deutsche Bank Stock Tumbles on Contagion Fears
Shares of Germany’s largest lender tumbled as much as 15%, their third consecutive day of losses, though they later regained some ground and closed down 8.5%. The cost to insure against its default using credit-default swaps soared to the highest levels since 2020.
The concern over Deutsche Bank emerged days after Credit Suisse Group AG was forced into a takeover by its larger and more stable rival UBS Group AG . Since the collapse of Silicon Valley Bank in the U.S. earlier this month, investors have scoured the globe for institutions perceived as vulnerable.
“People want to avoid anything that could come under focus,” said Jon Jonsson, credit portfolio manager at Neuberger Berman.
Deutsche Bank sits at the heart of the German economy. Despite years of retrenchment to make the bank smaller and safer, it remains a globally vital bank, with a major footprint on Wall Street trading bonds, derivatives and currencies. It serves multinational companies with bread-and-butter basics of lending, managing money and corporate accounts.
“Deutsche Bank has thoroughly modernized and reorganized its business model and it is a very profitable bank,” German Chancellor Olaf Scholz told reporters at an European Union summit in Brussels on Friday. “There is no reason whatsoever to be concerned.”
Some analysts and investors appeared perplexed that Deutsche Bank was taking the brunt of the market’s ire. Though it has long been considered one of Europe’s most problematic banks, an overhaul launched in 2019 stabilized its operations. Unlike Credit Suisse, Deutsche Bank’s deposit base has remained steady in recent quarters. Last year was the Frankfurt-based bank’s most profitable since 2007.
“The market is on edge. It seems to just be looking for targets,” said Tatjana Greil Castro, portfolio manager at Muzinich & Co.
Shares of other European banks also fell Friday, but by less than Deutsche Bank. Shares of crosstown rival Commerzbank AG dropped 6.5%. Barclays PLC was down 5.8%, as was France’s most valuable bank, BNP Paribas SA .
One factor hammering Deutsche Bank: Mentions of the German bank have exploded on social media in recent days, a bout of activity reminiscent of the social-media frenzy that surrounded Credit Suisse last fall and which that bank’s executives said was partly to blame for its eventual demise.
Markets have reeled since the sudden collapse of Silicon Valley Bank, reminding investors how quickly confidence can erode in banks. SVB was an institution few had on their radar screens. It failed in a matter of days despite an investment-grade credit rating and a seemingly devoted base of customers and investors.
The terms of the UBS takeover of Credit Suisse engineered by Swiss regulators shook European banking markets this week, especially a provision to write down $17 billion of Credit Suisse bonds. Known as additional tier one bonds or AT1s, these instruments are an important part of European bank capital, money regulators require them to raise to protect themselves from losses.
The price of AT1 bonds fell hard this week. The fewer investors are willing to pay for AT1 bonds and bank bonds in general, the higher the borrowing costs banks have to pay, squeezing their ability to turn a profit.
A Deutsche Bank AT1 bond issued in 2014 declined to 70 cents on the dollar on Friday from 95 cents at the start of the month, according to Tradeweb. Other bank AT1s also fell despite assurances from U.K. and European regulators about the importance of the capital instruments.
Deutsche Bank tried to ameliorate investor concerns over its debt on Friday by offering to redeem a separate type of subordinated bond, due in 2028. The offer promised to buy back the bonds at 100% of the principal, plus accrued interest, showing the bank has money to spare.
The price of those specific bonds jumped after the redemption offer. While that helped individual bondholders, it did little to assuage wider concerns.
Friday’s fall adds to the reversal in the shares from a huge upswing they and other European bank shares enjoyed to start the year. Rising interest rates in Europe and the U.S. promised fatter profits.
Deutsche Bank, like other European banks, suffered for years from Europe’s negative interest rates. When interest rates are near zero or negative, banks struggle to charge much more to lend than they pay on deposits, squeezing what is known in the industry as the net-interest margin.
Worries over the banks prompted investors Friday to dive into government bonds for safety, lowering yields, further suppressing the ability for banks to profit.
Deutsche Bank’s checkered past has long drawn skeptics. It paid regulatory fines for facilitating money laundering in Russia, for holding accounts for convicted sex offender Jeffrey Epstein and for weak internal controls.
Its asset-management arm, DWS, is under investigation in the U.S. for allegedly overstating sustainability claims over its investments. Last year, it agreed to extend the term of an outside compliance monitor after Justice Department prosecutors found the bank violated a criminal settlement by not disclosing a complaint about how DWS managed its ESG, or environmental, social and governance investments.
But investors and regulators have by and large lauded Deutsche Bank’s turnaround under Chief Executive Officer Christian Sewing, who took over in 2018. He shrank Deutsche Bank’s investment-banking business in the U.S., cut costs and focused on serving Germany’s mighty companies.
Unlike Credit Suisse, Deutsche Bank is profitable and its big litigation woes are mostly behind it, analysts said. The German lender avoided losses on the meltdown of Archegos Capital Management in 2021, which spread $10 billion of losses across Wall Street, with Credit Suisse taking about half of the pain.
“Deutsche is NOT the next Credit Suisse,” said analysts at Autonomous Research, a unit of AllianceBernstein. They added that interest-rate risk in Deutsche Bank’s books, which sparked troubles in U.S. banks, is in line with European peers and well below the levels of some U.S. regional banks.
—Caitlin McCabe contributed to this article.