The stock of Deutsche Bank AG (NYSE: DB) lost 3.11% to close last week’s trading session at $9.35 after credit default swaps recorded a steep increase, triggering worries over the stability of the European banking system. Notably, the share price has been on the decline for the last four trading sessions. In fact, the bank’s market cap has seen an erosion of 20% in value in March alone. Deutsche Bank’s issue pushed all the major European bank stocks into the red on Friday’s trading session. While Commerzbank lost 9%, Credit Suisse, UBS, and Societe Generale declined by over 7%. Barclays and BNP Paribas fell by over 6%.
Credit default swaps are a kind of insurance protecting the bank’s bondholders against default. Data published by Refinitiv indicated that Deutsche Credit Default Swaps recorded their biggest intra-day increase. Amidst worries over the European bank’s financial stability, last Thursday, the credit default swap rose from 142 bps to 200bps+. This is the highest level in four years. At the same time, certain bonds of Deutsche Bank got liquidated. Specifically, the bank’s Additional Tier-1 debt instruments carrying a coupon rate of 7.50% lost $0.03 to trade at $0.72868, lifting the yield to 24%. The return is twice what it was two weeks ago. The takeover of Credit Suisse by UBS involved the write-down of the Addition Tier-1 bonds.
The UBS initiated an urgent bailout of Credit Suisse, against the backdrop of the unexpected collapse of the US-headquartered Silicon Valley Bank, which has raised contagion worries among speculators and investors. The US policy tightening last week has increased worries.
While Swiss and international regulatory bodies and central banks believed that the takeover of Credit Suisse by UBS would pacify the markets, the market was not convinced that the buyout would relieve the stress in the banking industry.
Following a multibillion-euro restructuring that started four years ago to slash expenses and boost profit margins, the Frankfurt-based Bank had recorded 10 consecutive quarters of profit. Last year, the financial institution posted a net income of €5 billion, up 159% from the previous year.
The bank’s CET1 ratio, reflecting its solvency, was 13.40% at the end of last year. Deutsche Bank’s liquidity coverage ratio stood at 142%, while its stable funding ratio was 119%. The figures will not raise any doubt about the financial robustness of the institution.
To soothe the concerns of the market, on Friday, German Chancellor Olaf Scholz stated that the bank had completed restructuring and running an updated, profitable business model. Therefore, according to the Chancellor, there is no need to worry about its future.
Elsewhere in Europe, ECB President Christine Lagarde informed the EU leaders that the Euro banking system was robust due to a solid capital base, liquidity, and reforms made after the 2008 financial crisis. She also clarified that the central bank stands ready to offer additional liquidity to the banking system if required.
The sharp rise in credit default swaps is expected to keep the stock of Deutsche Bank slightly bearish in the short term.
The historical price chart indicates that the stock of Deutsche Bank is declining after facing resistance at 12. The next major support is anticipated only near 8. Additionally, the stock is trading below its 50-day moving average while the stochastic indicator is descending toward the bearish zone. Therefore, we anticipate the share price of Deutsche Bank to remain in a downtrend in the next few trading sessions.
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