Deutsche Bank becomes the eye of the storm in financial turmoil! Will it follow in Credit Suisse's footsteps?

Following Silicon Valley Bank and Credit Suisse, the focus of the global financial market shifted to Germany's largest bank - Deutsche Bank on the 24th. "Investors have sold Deutsche Bank shares, which pushed one of Europe's most important banks into the public eye worried about the development of the global financial industry", the Wall Street Journal reported on the 24th, Deutsche Bank's stock price plummeted on the day, the intraday decline once reached 15%, for the third consecutive trading day of decline, and finally closed down 8.5%. In addition, the bank's credit default swaps (CDS) soared to their highest level since 2020. Castro, portfolio manager at international investment firm Muzinich & Co, said, "The market is jittery. It seems to be just looking for a target." So, will Deutsche Bank become the next "thunderous" Credit Suisse under the banking crisis?

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How important is Deutsche Bank?

The Wall Street Journal introduced in an article on the 24th that Deutsche Bank is the largest bank in Germany, with total assets of about $1.448 trillion by the end of 2022. With nearly 85,000 employees in 58 countries, Deutsche Bank is one of 30 global systemically important banks closely monitored by regulators to maintain stability in the financial sector. Moreover, Deutsche Bank, much like JPMorgan Chase or Citigroup, is a full-service bank that ranges from lending to households and businesses, to advising on mergers and acquisitions, to advising large investors on securities transactions.

For Deutsche Bank's weight in the entire euro area and even the global financial industry, Xu Weihong, vice president of Yongxing Securities, said in an interview with the Global Times on the 26th that first of all, Deutsche Bank and Credit Suisse are different in systemic importance. From a global perspective, Deutsche Bank is one of the important systemic banks in the United States and the Eurozone, which not only has an important business distribution in the United States, but also plays an important role in the Eurozone. The Swiss banking system is relatively independent and not within the Eurosystem, and in this regard, Deutsche Bank's position in the eurozone is arguably more important than that of Credit Suisse.

"Banking crisis, Deutsche Bank fell", Deutsche Presse reported on the 24th that the collapse of Deutsche Bank's stock price triggered market concerns about European bank stocks on the same day. In this case, in order to stabilize investor sentiment, German Chancellor Scholz said at the end of the EU summit in Brussels on the 24th that "there is no reason to worry about anything." He stressed that Deutsche Bank has fundamentally modernized and restructured its business model and is a highly profitable bank.

Nevertheless, the reaction of European bank stock prices suggests that market sentiment has not been pacified. According to a number of foreign media reports, Commerzbank fell more than 8% intraday on the day; Societe Generale fell 6.72%; Standard Chartered shares fell 6.42%; Europe's Stoxx 600 bank stock index fell 5%. Deutsche Presse said the "bank earthquake" spread across Europe.

Stock prices plummeted, the market is worried about Deutsche Bank walking in the "footsteps" of Credit Suisse

"Online commentators have criticized Deutsche Bank as much as they criticized Credit Suisse late last year," the Wall Street Journal reported, adding that similar to the Credit Suisse affair, some concerns focused on the surge in Deutsche Bank's credit default swap price. CDS is a derivative contract that is one of the main credit risk mitigation tools for over-the-counter trading, and investors use it to hedge their risk. The spike reflects concerns about the banking system.

Germany's "Süddeutsche Zeitung" reported on the 24th that the surge in CDS prices was the main reason for the decline in Deutsche Bank's stock price. Data from S&P Global showed that the Deutsche Bank CDS risk premium rose from 142 basis points on the 22nd to 208 basis points on the 24th. Many stock investors see this as a sign of panic: Is Deutsche Bank hiding something? Although Deutsche Bank has returned to profitability since 2020, financial markets are now asking themselves: Who will be the next big weak bank after Credit Suisse?

As for Deutsche Bank's share price drop in the market, the Wall Street Journal quoted some analysts and investors as saying that although Deutsche Bank has long been considered one of the most troubled banks in Europe, the comprehensive reforms it launched in 2019 have stabilized the business. They argue that, unlike Credit Suisse, Deutsche Bank's deposit base has remained stable in recent quarters.

So, will Deutsche Bank follow in the footsteps of credit? Xu Weihong believes that Credit Suisse's "thunder" is directly related to its financial fraud in the previous three years. But at present, Deutsche Bank has not yet exposed the real hammer of financial fraud. However, it has some exposure to U.S. commercial real estate. From the perspective of the past 10 years, especially after the subprime mortgage crisis, the European banking industry is facing a new round of asset and main business combing, Deutsche Bank, as one of the most important systemic banks in the euro area, is also carrying out financial combing, followed by diversifying its business and finding its own business sector structure to enhance the ability to resist systemic risks.

After the Credit Suisse turmoil, the European banking sector became sensitive

Even though many analysts have expressed some optimism about the future direction of Deutsche Bank, the market has become sensitive after the Credit Suisse turmoil. From the president of the European Central Bank to French President Emmanuel Macron, German Chancellor Scholz have tried to calm market sentiment with words such as "resilient" and "most stable", but the German "Focus" weekly reported on the 25th that the banking crisis is still threatening. Huttertel, head of the German Institute for Economic Research in Cologne, believes that even after Credit Suisse was bailed out, the dangers of the European financial system have not been eliminated. The "herd instinct" of depositors (following popular ideas and behaviors) makes bank runs "incalculable".

On the 26th, the special correspondent of the Global Times in Germany went to a number of Deutsche Bank branches in Berlin, and did not find customers who waited in long lines to withdraw money. A number of bank staff told reporters that customers do not have to worry about their deposits in the bank. According to Germany's statutory deposit insurance regulations, the insurance limit per person at each bank is €100,000. Nevertheless, the reporter learned that quite a number of Deutsche Bank's private and corporate customers have transferred their deposits to other banks.

Xu Weihong believes that compared with the United States, the current problems faced by the European banking industry mainly come from the following two aspects: First, the European banking industry lacks high-quality real economy loan customers. Like the collapse of Silicon Valley banks, it is more a problem of Silicon Valley companies themselves. The main problem of the European banking industry is the hollowing out of European industries, which affects the expansion of bank lending business. Second, the ECB was forced to follow the Fed's interest rate hike to hit the entire European banking sector, German and French Bunds, which were previously negative interest rates, have now become positive interest rates, the provision of government bonds and corporate bonds has suffered a large loss, and the valuation of bank stocks has also been questioned by investors.

Source: Global Times