Deutsche Bank shares slide 9% after sudden spike in the cost of insuring against its default

Deutsche Bank shares fell by more than 9% in early trade on Friday following a spike in credit default swaps on Thursday night, as concerns about the stability of European banks persisted.

The German lender’s shares retreated for a third consecutive day and have now lost more than a fifth of their value so far this month. Credit default swaps — a form of insurance for a company’s bondholders against its default — leapt to 173 basis points on Thursday night from 142 basis points the previous day.

The emergency rescue of Credit Suisse by UBS, in the wake of the collapse of U.S.-based Silicon Valley Bank, has triggered contagion concern among investors, which was deepened by further monetary policy tightening from the U.S. Federal Reserve on Wednesday.

Deutsche Bank’s additional tier one (AT1) bonds — an asset class that hit the headlines this week after the controversial writedown of Credit Suisse’s AT1s as part of its rescue deal — also sold off sharply.

Deutsche led broad declines for major European banking stocks on Friday, with Commerzbank, Credit Suisse, Societe Generale and UBS all falling more than 5%.

After completing a multibillion euro restructure that began in 2019, with the aim of reducing costs and improving profitability, Deutsche Bank has reported 10 straight quarters of profit. The lender reported an 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 — came in at 13.4% at the end of 2022, while its liquidity coverage ratio was 142% and its net stable funding ratio 119%.

Financial regulators and governments have taken action in recent weeks to contain the risk of contagion from the problems exposed at individual lenders, and Moody’s said in a note Wednesday that they should “broadly succeed” in doing so.

“However, in an uncertain economic environment and with investor confidence remaining fragile, there is a risk that policymakers will be unable to curtail the current turmoil without longer-lasting and potentially severe repercussions within and beyond the banking sector,” the ratings agency’s credit strategy team said.

“Even before bank stress became evident, we had expected global credit conditions to continue to weaken in 2023 as a result of significantly higher interest rates and lower growth, including recessions in some countries.”

Moody’s suggested that, as central banks continue their efforts to reel in inflation, the longer that financial conditions remain tight, the greater the risk that “stresses spread beyond the banking sector, unleashing greater financial and economic damage.”