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

  • Credit Suisse’s emergency rescue by UBS in the wake of the collapse of the US-based Silicon Valley bank has sparked contagion anxiety among investors.
  • It was deepened by further monetary policy tightening from the US Federal Reserve on Wednesday.
  • Deutsche Bank has spent billions of euros in restructuring in recent years aimed at cutting costs and improving profitability.
  • Deutsche Bank reports annual net income of 5 billion euros ($5.4 billion) in 2022, up 159% from the previous year.

General Meeting of Deutsche Bank

Arne Dedert | Image alliance | Good pictures

Deutsche Bank shares fell on Friday as the German lender weighed on market panic over the stability of the European banking sector.

However, many analysts were left scratching their heads as to why a bank with 10 consecutive quarters of profitability and strong capital and leverage positions had become the market’s next target in a “search and destroy” mode.

Credit Suisse, which was emergency rescued by UBS in the wake of the collapse of the US-based Silicon Valley bank, has sparked contagion among investors, deepened by further tightening of monetary policy from the US Federal Reserve on Wednesday.

Central banks and regulators hoped the Credit Suisse rescue deal brokered by Swiss authorities would help calm investor jitters about the stability of Europe’s banks.

But the 167-year-old Swiss company’s collapse and the lender’s lifting of hierarchy rules wiped out 16 billion Swiss francs ($17.4 billion) of Credit Suisse’s additional tier-one (AT1) bonds, leaving the market in disbelief about the deal. will be sufficient to control the stresses in the field.

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Deutsche Bank has spent billions of euros in restructuring in recent years aimed at cutting costs and improving profitability. The lender has posted annual net income of 5 billion euros ($5.4 billion) in 2022, up 159% from 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 stood at 142% and its net fixed funding ratio at 119%. These figures do not imply that there is no reason to worry about the bank’s solvency or liquidity position.

German Chancellor Olaf Scholes told a news conference in Brussels on Friday that Deutsche Bank had “completely restructured and modernized its business model and is a very profitable bank”, adding that there was no basis for speculation about its future.

‘Not so scary’

Some of the concerns surrounding Deutsche Bank have centered around its US commercial real estate exposures and sizable derivatives book.

However, AllianzBernstein’s subsidiary Autonomous on Friday dismissed these concerns as “well-known” and “not too alarming”, pointing to the bank’s “strong capital and liquidity positions”.

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

“We have no concerns about Deutsche’s creditworthiness or asset scores. To be clear – Deutsche is not the next Credit Suisse.”

Unlike the beleaguered Swiss lender, they highlighted Deutsche as “solidly profitable” and the autonomous firm forecast a return on firm book value of 7.1% for 2023, rising to 8.5% by 2025.

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‘New and intense focus’ on liquidity

According to JP Morgan, Credit Suisse’s decline is down to a combination of three factors. These were “a string of management failures that eroded confidence in management’s abilities”, a challenging market backdrop that hampered the bank’s restructuring plan and the market’s “new and intense focus on liquidity risk” in the wake of SVB’s collapse.

Although the latter proved to be the final trigger, the Wall Street bank argued that the importance of the context in which Credit Suisse was trying to adapt its business model could not be underestimated, as illustrated by comparisons with Deutsche.

“The German bank had its own interventionist pressures and administrative hurdles, and in our view had very low quality equity to begin with, although it is significantly lower today, commanding a relatively high price base and relying on its FICC (Fixed Income, Currencies and Commodities) organic capital formation. and the right to trade for credit re-rating,” JP Morgan strategists said in a note on Friday.

“In comparison, Credit Suisse has clearly shared the struggles of running a cost and capital intensive IB. [investment bank], long since it still owns both a high-quality asset and wealth management franchise and a profitable Swiss bank; All these are well capitalized from both RWA [risk-weighted asset] and stance of foreign expression.”

They added that the events of recent months have demonstrated that, regardless of the quality of ownership, such companies “rely entirely on faith”.

“Deutsche’s management hiccups, unable to raise the ‘cost’ to the bank in loss of ownership, Credit Suisse’s was immediately punished by an exodus of investors in the wealth management division, deepening what should have been considered the bank’s ‘crown jewel’. P&L losses,” they noted.

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At the time of SVB’s collapse, Credit Suisse was already concerned about its liquidity position and faced massive outflows in the fourth quarter of 2022, which has yet to reverse.

JP Morgan could not determine whether the unprecedented depositor outflows by the Swiss bank in light of SVB’s failure were self-inflicted or driven by fear of those outflows and a “lack of assurances from management”.

“Indeed, if depositors have learned anything from the past few weeks in the US and Europe, it is how far regulators will always go to ensure depositors are protected,” the note said.

“Be that as it may, the lesson for investors (and indeed issuers) is clear – ultimately, confidence is what matters, whether derived from the overall market backdrop (again recalling Deutsche Bank’s successful re-rating) or the ability to provide greater transparency to opaque liquidity activities by management.”

—CNBC’s Michael Bloom contributed to this report.

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