“Deutsche Bank has really taken Credit Suisse’s place as the next weak link in the chain, perhaps wrongly,” said analyst David Goebel of Evelyn Partners. The fall in the shares of the European number one thus pulls down the shares of other major European banks as well.
What is Deutsche Bank and why is it so important?
The bank is the largest German lender with total assets of approximately 1.337 trillion euros, which is more than 31.660 trillion crowns. At the same time, it employs 85,000 people in 58 countries and is one of the 30 most important global banks that are monitored by regulators who supervise to ensure financial stability. The Wall Street Journal.
Like JPMorgan or Citigroup, it is a one-size-fits-all bank that does everything from lending to households and businesses to advising on corporate mergers and trading securities for large investors.
Why are investors so worried about the situation in the financial sector?
Investors are worried about the health of the banking sector after the sudden collapse of Silicon Valley Bank, Silvergate Capital and Signature Bank in the US and the emergency takeover of Switzerland’s Credit Suisse by domestic rival UBS.
Banks have proven vulnerable to sudden changes in the era of online banking and social media. In addition, some banks were poorly prepared for rising interest rates and paid for it with high losses due to declines in bond prices in their portfolios.
In addition, the Credit Suisse takeover led to the controversial forgiveness of about $17 billion in debt known as additional Tier 1 bonds. This is likely to have raised the cost of funding banks across Europe, even as authorities in the European Union and Britain distanced themselves from the Swiss’s move.
“The collapse of three banks in the United States, or the forced takeover of the Swiss Credit Suisse UBS, means that a smooth landing of the economy is more and more just a dream of central bankers,” XTB analyst Štěpán Hájek told ČTK. “The economy is likely to hit hard later this year, which is exactly what the financial markets are pricing in now. We still don’t know the intensity of this decline, which keeps stock indices at relatively high levels,” he added.
Why are Deutsche Bank shares suffering?
Commentators had already predicted and feared certain problems for Deutsche Bank. The price of so-called credit default swaps, or simply CDS, soared during the day on Friday, according to data from S&P Market Intelligence, the highest in the last four years. Their increase probably reflects general concern about the banking system.
However, Deutsche Bank has experienced hard times a few times in the past. After the financial crisis, this bank tried to regain its former good reputation and position. It suffered losses, there were extensive restructurings as well as turnover of executives or high fines. Like Credit Suisse, Deutsche Bank has been plagued by crises and scandals in recent years.
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Is Deutsche Bank really in trouble?
Deutsche Bank is in much better shape than Credit Suisse. Since 2018, Deutsche Bank has been led by CEO Christian Sewing, a man with deep experience in auditing, risk management and retail banking, reports The Wall Street Journal. Under his leadership, the bank became more profitable and less prone to unexpected problems.
Last year, net profit reached 5.6 billion euros. Return on tangible assets, a key measure of profitability, came in at a solid 9.4 percent, beating forecasts. The bank has also built up substantial capital reserves.
“To be clear – Deutsche is NOT the next Credit Suisse,” wrote Autonomous Research analysts Stuart Graham and Leona Li in a note on Friday, reports The Wall Street Journal. The bank is solidly profitable, has the strongest capital ratios since the late 1990s and has lower interest rate risk than regional U.S. banks, Graham and Li said.
