Weekends are usually times of quiet reflection. But bank turmoil turned the past two into frenzied panics for some. Anxious German bankers may build some optionality into plans for this weekend: Deutsche Bank’s shares fell as much as 14 per cent on Friday morning.
The cause appeared to be a jump in the cost of insuring against a Deutsche bond default. No underlying reasons for the latter were evident among usual suspects. That leaves the likely culprit as investor jitters following the shotgun marriage last weekend of Credit Suisse, like Deutsche a European bank with a patchy record.
The difference is that Deutsche stabilised long ago. It is solidly, if not highly, profitable with a return on tangible equity of about 7 to 8 per cent. It has a reasonable amount of insured deposits, about 32 per cent, points out Autonomous. The liquidity coverage ratio is a tolerable 142 per cent.
European banks are relatively insensitive to rate shifts, says JPMorgan. For every 1 per cent change in regional bond yields, European banks suffer about half a per cent revaluation impact to their bond holdings. US banks have seven times that sensitivity.
The potential revaluation hit to Deutsche’s common equity tier one capital of 13.4 per cent would be slight. Silicon Valley Bank’s revaluation risk was a tenth of its equivalent capital buffer.
Commercial real estate risk offers more to worry about. More than half of Deutsche’s 7 per cent CRE loan exposure — €28.1bn — is in the US, more than rivals. Smaller US regional banks have more than 45 per cent exposure, according to Oxford Economics data.
Even pessimistic analysts struggle to doubt Deutsche’s financial resilience. But one cannot underestimate the effect of market angst. Some investors wanted out of banks before the weekend gave financial authorities a chance for further stitch-ups. But the drop in Deutsche’s shares is more likely noise than a signal of danger ahead.
The Lex team is interested in hearing more from readers. Please tell us what you think of Deutsche Bank in the comments section below.