Banking stocks tumbled in Europe on Friday with heavyweights Deutsche Bank and UBS Group pummelled by worries that the worst problems in the sector since the 2008 financial crisis are not contained, while stress indicators in the currency and bond markets flash warning signs.
In a third day of losses, Deutsche Bank sank more than 12 per cent after a sharp jump in the cost of insuring the German giant's bonds against the risk of default.
Its shares have lost a fifth of their value so far this month and the cost of its 5-year credit default swaps (CDS) jumped to a four-year high on Friday, based on data from S&P Market Intelligence.
PETER GARNRY, HEAD OF EQUITY STRATEGY, SAXO BANK, DENMARK
“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. “
“The pressure on bank stocks continued yesterday even after Yellen tried to soften her rhetoric on the Biden administration's stance on official action if the turmoil in the banking system continues. Headline risk and the price action in bank stocks will remain in focus, and not just in the US, but also in Europe, where the stress on Tier1 bank debt shows that banks' profitability outlook is under threat on rising funding costs.”
FREDERIQUE CARRIER, HEAD OF INVESTMENT STRATEGY, RBC WEALTH MANAGEMENT, LONDON
“When the tide recedes, it tends to expose weakness and this is what we have seen. We are optimistic that the cases of SVB and Credit Suisse are isolated and contained, but in our view the tail risk has not entirely gone. Scars heal slowly and concerns about the sector are likely to linger. The banking system is based on confidence so we have to monitor future developments very closely.
"Bank stocks have fallen a lot and look cheap. As part of a global diversified portfolio, there is certainly room for high quality banks, but we would be cautious. We wouldn't hold more than a benchmark position, because with an uncertain economic outlook it is likely to become more difficult for banks- their cost of capital and funding are likely to increase and they will probably have to pay more to attract deposits. In the case of European banks, capital distribution is uncertain as capital preservation may have to take precedence.”
PAUL VAN DER WESTHUIZEN, SENIOR STRATEGIST, RABOBANK, NETHERLANDS
"It seems to be driven by a serious downturn in Deutsche Bank's equity price... Deutsche is a bank that has had its own issues with regulators, it has also seen profit volatility and gone through a restructuring. 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."
"It seems like post what happened to Credit Suisse last weekend, two things might be at play here. First of all, investors don't want to hold on to positions that have any concern around them over the weekend. Getting out of such positions is probably what we're seeing with Deutsche Bank. And of course there is money to be made if you're on the right side of an overreaction in the stocks."
“European banks probably suffered from contagion from what was going on in the US, where the regional banks seem to be under pressure in the rising rate environment. European banks have, in fact, had no fundamental issues whatsoever. They are sound and historically stronger than they've ever been. They have been benefiting from the rising interest rate environment and their profitability metrics are finally started kicking up. We had the outlier of Credit Suisse which was there was a sudden lack of trust that led to the run on the bank, but that came from quite a few years of mismanagement and scandal.”
AUTONOMOUS RESEARCH, LONDON
“We are relatively relaxed in view of Deutsche's robust capital and liquidity positions.””
“We have no concerns about Deutsche's viability or asset marks. To be crystal clear - Deutsche is NOT the next Credit Suisse.”
JAN VON GERICH, CHIEF ANALYST, NORDEA, HELSINKI
"Underlying sentiment is still cautious and in this environment no one wants to go into the weekend risk on."
"It's very volatile and it's too early to say things will calm down."
"It's crazy how volatile markets are."
"All of this is happening at a time of exceptionally high inflation environment and adds to the volatility."
JUSSI HILJANEN, HEAD OF EUROPEAN RATES STRATEGY, SEB, SWEDEN
“Generally speaking in this kind of environment markets are quite keen on looking at the weakest link. In general markets are quite worried and are focusing on the potential next domino. If it’s reasonable to focus on Deutsche or not I really don’t know.”
“When these kind of worries hit the market, it’s quite usual that markets buy (the bonds of) Germany, which is outperforming as a flow to safety.”