A branch of Deutsche Bank AG in the financial district of Frankfurt, Germany, on Friday May 6, 2022.
Alexander Kraus Bloomberg | Getty Images
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Deutsche Bank is the latest bank to suffer a panic sell-off. But analysts said it was an irrational move by markets.
Markets are turning back to the banking sector after central banks around the world make their interest rate decisions. In today’s heated atmosphere, however, caution can quickly – and indiscriminately – turn to paranoia.
Deutsche Bank appears to be the latest victim of the market panic. On Friday, after the price of its credit default swaps rose to its highest level since 2018, investors triggered a sell-off at Deutsche Bank.
The move is largely irrational, analysts say. Deutsche Bank is not another Credit Suisse in two key respects.
First, take a look at the fourth quarter reports. Deutsche Bank reported net income of 1.8 billion euros ($1.98 billion), giving it a 2022 net income of 5 billion euros. In contrast, Credit Suisse had a loss of 1.4 billion Swiss francs ($1.51 billion) in the fourth quarter, for a full-year loss of 7.3 billion Swiss francs. The difference between the two European banks could not be greater.
Second, Deutsche Bank’s liquidity coverage ratio was 142% at the end of 2022, meaning the bank had more than enough liquid assets to cover a sudden cash outflow for 30 days. On the other hand, Credit Suisse announced that it had to use “liquidity buffers” in 2022 as the Swiss bank fell short of regulatory liquidity requirements.
Research firm Autonomous, a subsidiary of AllianceBernstein, was so confident in Deutsche Bank that it issued a research note stating, “We have no concerns about Deutsche’s profitability or wealth metrics. To be clear – Deutsche is NOT the next Credit Suisse.”
As the Deutsche Bank episode reverberated through European markets, US investors seemed less concerned. In fact, the SPDR S&P Regional Banking ETF was up 3.03% on Friday. Major indices also rose – not just for the day, but for the week. The Dow Jones Industrial Average rose 0.41%, giving it a 0.4% gain on the week. The S&P 500 rose 0.56%, contributing to a 1.4% weekly gain. The Nasdaq Composite gained 0.3% to end the week up 1.6%.
Given the market volatility, this is an impressive feat. Unfortunately, there is no promise of stability this week. The consumer spending index — the Fed’s key inflation measure — is released on Friday and “is getting sticky,” said Marc Chandler, chief markets strategist at Bannockburn Global Forex. But the banking crisis will continue to grip markets so tightly that they may not care as much about inflation – for better or for worse.
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