A branch of Deutsche Bank AG in the financial district of Frankfurt, Germany, on Friday, May 6, 2022.
Alex Krause | bloomberg | Getty Images
This report is from today’s CNBC Daily Open, the new newsletter for international markets. The CNBC Daily Open updates investors everything they need to know quickly, no matter where they are. Like what do you see? You can subscribe here.
Deutsche Bank is the latest bank to suffer panic selling. But analysts said it was an irrational move by the markets.
Now that central banks around the world are making their decisions about interest rates, markets are turning their attention back to the banking sector. But in today’s fraught atmosphere, caution can transition quickly—and arbitrarily—to paranoia.
Deutsche Bank appears to be the latest victim of market panic. On Friday, after the price of credit default swaps rose to its highest levels since 2018, investors launched a sell-off in the German bank.
Analysts say the move is mostly irrational. Deutsche Bank is not another Credit Suisse bank in two main respects.
First, take a look at the fourth quarter reports. Deutsche Bank reported a net profit of 1.8 billion euros ($1.98 billion), giving it annual net income for 2022 of 5 billion euros. By contrast, Credit Suisse posted a loss in the fourth quarter of 1.4 billion Swiss francs ($1.51 billion), which put it at a loss of 7.3 billion Swiss francs for the full year. The difference between the two European banks could not be starker.
Second, Deutsche Bank’s liquidity coverage ratio was 142% at the end of 2022, which means the bank has more than enough liquid assets to cover a 30-day sudden cash inflow. On the other hand, Credit Suisse revealed that it had to use “liquidity reserves” in 2022 as the Swiss bank fell short of regulatory requirements for liquidity.
Research firm Autonomous, a subsidiary of AllianceBernstein, was so confident in Deutsche Bank that it issued a research note saying: “We have no concerns about Deutsche’s viability or asset labels. And to be absolutely clear – Deutsche is not the next Credit Suisse.”
While the Deutsche Bank incident reverberated through European markets, US investors seemed less concerned. In fact, the SPDR S&P Regional Banking Index rose 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%, making it a gain of 0.4% on a weekly basis. The S&P 500 rose 0.56%, contributing to a weekly increase of 1.4%. The Nasdaq Composite added 0.3%, ending the week up 1.6%.
It’s an impressive proposition given the volatility of the market. Unfortunately, there is no promise of stability this week. Mark Chandler, chief market strategist at Bannockburn Global Forex, said the PCE price index — the Fed’s most important inflation reading — will be released on Friday, and will be “flawed.” But the banking crisis will continue to grip markets so badly that they may not care about inflation as much – for better or for worse.
Participate here To have this report sent straight to your inbox each morning before the markets open.
“Infuriatingly humble analyst. Bacon maven. Proud food specialist. Certified reader. Avid writer. Zombie advocate. Incurable problem solver.”