by Sruthi Shankar, Amanda Cooper and Amruta Khandekar
(Reuters) – Banking stocks were again rocked in Europe on Friday, especially Deutsche Bank and UBS, as investors feared the sector’s struggles for several days would also spread to these two heavyweights.
The Stoxx Banks Index lost 5.19% around 11:55 GMT.
At the bottom of the Stoxx 600 is Deutsche Bank. The first German bank unscrews by 14.27%, the lowest since mid-October, while a sharp increase in the cost of insurance against the risk of payment default fuels concerns about the stability of the entire European banking ecosystem .
Deutsche Bank’s five-year credit default swap (CDS) climbed more than 220 basis points, the highest since late 2018, from 142 basis points just two days ago, data from S&P Market Intelligence shows.
CDS from Europe’s biggest banks are rising, showing that investors are not willing to take any risk in their portfolios heading into the weekend.
“Deutsche Bank has been in the spotlight for some time, in the same way that Credit Suisse has been,” said Stuart Cole, chief macroeconomist at Equiti Capital. “It has gone through several restructurings and management changes in an attempt to regain a solid base, but so far none of these efforts seem to have really paid off.”
The bank declined to comment, as did the president of the Bundesbank and the German financial regulator (BaFin).
“We’re still waiting for another domino to fall and Deutsche is clearly the next one everyone is thinking of (rightly or wrongly),” said IG analyst Chris Beauchamp.
THE UBS-CREDIT SUISSE MARRIAGE IN QUESTION
In Zurich, Credit Suisse and UBS lost 6.17% and 5.78% respectively. And UBS’s five-year CDS rose 14 basis points from Thursday’s close to 130 basis points.
The Bloomberg agency reported that the two banks, which are in the process of being reconciled, are among the establishments targeted by an investigation by the United States Department of Justice to determine whether they potentially helped Russian oligarchs to evade sanctions.
Neither of the two Swiss banks wanted to comment on this information and the US Department of Justice did not immediately respond to a request for comment.
Jefferies lowered its recommendation on UBS from “buy” to “hold”, the broker believing that the acquisition of competitor Credit Suisse would change its image with investors (‘equity story’), based so far on a risk profile more weak, on organic growth and a significant return on capital.
“All of these elements, which UBS shareholders bought into, are gone, probably for years,” Jefferies said.
Several sources told Reuters that the leading Swiss bank had promised retention bonuses to employees of Credit Suisse’s wealth management arm in Asia to prevent a talent drain.
European banks’ Additional Tier 1 (AT1) bonds are also under pressure.
In Paris, Crédit Agricole, BNP Paribas and Société Générale drop from 3.26% to 7.01%.
REGULATORS STRUGGLE TO EASE FEARS
The banking sector has been shaken globally since the sudden bankruptcies of two regional banks in the United States, which raised fears of wider contagion.
Regulators, politicians and central bankers have insisted that the turmoil is quite different from the 2008 financial crisis, saying banks have stronger levels of capital and liquidity.
For the fourth time in a week, US Treasury Secretary Janet Yellen spoke on Thursday to try to reassure households – and the markets – about the safety of the banking system and the protection of deposits.
If his remarks allowed Wall Street to close higher on Thursday, the “futures” on indices are now in the red and the big banks like Goldman Sachs or JPMorgan are retreating in the forecourt exchanges.
“For investors, the authorities are still concerned about the potential for contagion,” said Susannah Streeter at Hargreaves Lansdown.
(Reuters offices; writing by Toby Chopra, French version Laetitia Volga, editing by Kate Entringer and Blandine Hénault)
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