Deutsche Bank not next Credit Suisse, analysts say as panic spreads

German Bank shares slid on Friday as the cost of insuring against its default soared, as the German lender was engulfed in market panic over the stability of the European banking sector.

However, many analysts wondered why the bank, which has posted 10 straight quarters of profits and enjoys strong capital and solvency positions, had become the next target in a market seemingly in “search and destroy” mode.

THE emergency rescue of Swiss credit by UBSfollowing the collapse of US-based Silicon Valley Banksparked contagion concern among investors, which was compounded by further monetary policy tightening US Federal Reserve Wednesday.

Central banks and regulators had hoped that the Credit Suisse rescue deal, negotiated by the Swiss authoritieswould help calm investors’ nervousness about the stability of European banks.

But the fall of the 167-year-old Swiss institution and the upheaval in the rules of the hierarchy of creditors eliminate 16 billion Swiss francs ($17.4 billion) of Credit Suisse’s additional Tier 1 (AT1) obligations, left the market skeptical about the deal’s ability to contain tensions in the sector.

German Bank underwent a multi-billion euro restructuring in recent years aimed at reducing costs and improving profitability. The lender recorded an annual net income of 5 billion euros ($5.4 billion) in 2022up 159% over the previous year.

Its CET1 ratio – a measure of bank solvency – stood at 13.4% at the end of 2022, while its liquidity coverage ratio was 142% and its net funding ratio stable at 119%. These figures do not indicate that there is cause for concern about the solvency or the liquidity situation of the bank.

German Chancellor Olaf Scholz told a press conference in Brussels on Friday that Deutsche Bank had “thoroughly revamped and modernized its business model and is a very profitable bank”, adding that there was no reason to speculate on his future.

“Just not very scary”

Some of the concerns about Deutsche Bank have centered on its US commercial real estate exposures and its large derivatives portfolio.

However, research firm Autonomous, a subsidiary of AllianceBernstein, on Friday dismissed such concerns as both “well known” and “just not terribly scary”, pointing to the company’s “strong capital and liquidity positions”. bank.

“Our underperforming rating on the stock is simply driven by our view that there are more attractive stock stories elsewhere in the sector (i.e. relative value),” the strategists said. Stuart Graham and Leona Li in a research note.

“We have no concerns about Deutsche’s viability or asset brands. To be clear, Deutsche is NOT the next Credit Suisse.”

Unlike the struggling Swiss lender, they stressed that Deutsche is “solidly profitable” and Autonomous expects a return on tangible book value of 7.1% for 2023, rising to 8.5% by 2025.

“New and Intense Focus” on Liquidity

Credit Suisse’s collapse came down to a combination of three causes, according to JPMorgan. It was a “series of governance failures which had eroded confidence in management’s abilities”, a difficult market environment which hampered the bank’s restructuring plan and “the careful new and intense market on liquidity risk” following the collapse of the SVB.

While the latter proved to be the final trigger, the Wall Street bank argued that the significance of the environment in which Credit Suisse was trying to overhaul its business model could not be underestimated, as illustrated a comparison with Deutsche.

“The German bank had its own share of headline pressure and governance issues, and in our view had a much lower quality franchise to begin with, which, although significantly less leveraged today, still commands a base of relatively high costs and relied on its FICC (fixed income, currencies and commodities) for organic capital generation and credit repricing,” JPMorgan strategists said in a note Friday.

“In comparison, although Credit Suisse clearly shared the challenges of running a capital- and cost-intensive IB [investment bank], it still had both a high-quality asset and wealth management franchise and a profitable Swiss bank up its sleeve; all well capitalized by both an RWA [risk-weighted asset] and Leverage the point of view of the exhibition.”

They added that no matter how good the franchise, events in recent months had proven that such institutions “are all about trust.”

“Where Deutsche’s governance failures could not incrementally ‘cost’ the bank anything in franchise loss, Credit Suisse was immediately punished with investor exits in the Wealth Management division, causing this which should have been considered the bank’s ‘crown jewel’ to deepen the bank’s P&L losses,” they noted.

At the time of SVB’s collapse, Credit Suisse was already in the spotlight on its liquidity position and had suffered massive outflows in the fourth quarter of 2022 that had yet to be reversed.

JPMorgan was unable to determine whether the unprecedented depositor outflows suffered by the Swiss bank had been amassed on their own in light of SVB’s failure, or had been driven by fear of those outflows. and “lack of conviction in management’s assurances”.

“Indeed, if there is anything depositors could learn from the past few weeks, both in the United States and in Europe, it is how far regulators will always go to ensure that depositors are protected. “, reads the note.

“Either way, the lesson for investors (and indeed issuers) here is clear – ultimately trust is key, whether it stems from the larger market context (again recalling the more successful revaluation of Deutsche Bank), or management’s ability to provide more transparency to otherwise opaque liquidity measures.”

— CNBC’s Michael Bloom contributed to this report.