LONDON: European banking stocks fell sharply on Friday, with Deutsche Bank and UBS knocked by worries that actions by regulators and central banks have not yet contained the worst problems to face the sector since the 2008 global financial crisis.
Financial market stress indicators were also again flashing warning signs more widely, with the euro falling against the dollar and bond yields sinking.
Deutsche Bank shares fell for a third day, dropping more than 12% after a sharp jump in the cost of insuring its bonds against the risk of default.
Shares in Germany’s largest bank have lost a fifth of their value so far this month and the cost of its 5-year credit default swaps (CDS) – a form of insurance for bondholders – jumped to a four-year high on Friday, based on data from S&P Market Intelligence.
“Deutsche Bank has been in the spotlight for a while now, in a similar way to how Credit Suisse had been,” said Stuart Cole, head macro economist at Equiti Capital.
“It has gone through various restructurings and changes of leadership in attempts to get it back on a solid footing but so far none of these efforts appear to have really worked.”
Deutsche Bank declined to comment.
The pain was spread across the sector, with the index of top European banks falling 5.1% and British banks losing 4%, down for a third straight session.
“We are still on edge waiting for another domino to fall, and Deutsche is clearly the next one on everyone’s minds (fairly or unfairly), said Chris Beauchamp, chief market analyst at IG.
The fresh falls in Europe came as investors were looking to see how farUS authorities would go to shore up the banking sector, particularly fragile regional lenders.
US treasury secretary Janet Yellen told lawmakers on Thursday that bank regulators and the Treasury were prepared to make comprehensive deposit guarantees at other banks, as they did at failed Silicon Valley Bank (SVB) and Signature Bank.
Shares of major US banks JPMorgan Chase & Co, Wells Fargo and Bank of America fell more than 2% in premarket trade on Friday.
Regional lenders, the focus of the strongest investor concerns, also declined, with First Republic Bank, PacWest Bancorp, Western Alliance Bancorp and Truist Financial Corp falling between 2% and 5%.
“Underlying sentiment is still cautious and in this environment no one wants to go into the weekend risk-on,” said Nordea chief analyst Jan von Gerich.
UBS challenges
The global banking sector has been rocked since the sudden collapse this month of SVB and Signature Bank.
Policymakers have stressed the turmoil is different from the global financial crisis 15 years ago, saying banks are better capitalised and funds more easily available.
But the worries spread quickly, and on Sunday UBS was rushed into taking over Swiss rival Credit Suisse after it lost the confidence of investors.
Swiss authorities and UBS are racing to close the takeover within as little as a month, according to two sources with knowledge of the plans.
Separate sources told Reuters that UBS has promised retention packages to Credit Suisse wealth management staff in Asia to stem a talent exodus.
Brokerage group Jefferies cut its recommendation on UBS stock to “hold” from “buy”, saying the acquisition of its former rival would change an equity story based on a lower risk profile, organic growth and high capital returns.
“All these elements, which is what UBS shareholders bought into, are gone, likely for years,” it said.
UBS shares were down 7% on Friday and its five-year CDS shot up 14 basis points.
AT1 bonds
The rescue of Credit Suisse has also ignited broader worries about investors’ exposure to a fragile banking sector. The decision to prioritise shareholders over Additional Tier 1 (AT1) bondholders rattled the $275 billion AT1 bond market.
These convertible bonds were designed to be invoked during rescues to prevent the costs of bailouts falling onto taxpayers.
As part of the deal with UBS, the Swiss regulator determined that Credit Suisse’s AT1 bonds with a notional value of $17 billion would be wiped out, stunning global credit markets.
European banks’ AT1 debt came under fresh selling pressure on Friday, with Deutsche Bank and UBS AT1s down around four and two cents in price, respectively, according to Tradeweb data.
Standard Chartered Chief Executive Bill Winters said on Friday the wipeout of Credit Suisse bondholders had “profound” implications for global bank regulations.
“I think it had very profound implications for the regulation of banks, and for the way that banks manage themselves,” Winters told a financial forum in Hong Kong.
He also said theUS Federal Reserve’s move to guarantee non-insured deposits was a “moral hazard”.
US authorities had invoked “systemic risk exceptions” after the failures of SVB and Signature Bank that allowed them to protect uninsured deposits, including those of wealthy technology executives and cryptocurrency investors.

Futures for the Dow Jones Industrial Average slid 1% before the bell and the benchmark S&P 500 fell 0.8%.

Most U.S. bank stocks fell between 2% and 4%, dragged down by Deutsche Bank, which fell more than 10% on reports that the company was facing higher costs for insuring itself against default.

Investors are worried that more banks might suffer a debilitating exodus of customers following the second- and third-largest U.S. bank failures in history. That turmoil is clouding the outlook for what the Federal Reserve will do with interest rates after hiking them to market-rattling heights over the last year.

The fear is that all the turmoil in the banking industry could cause a sharp pullback in lending to small and midsized businesses around the country. That could put more pressure on the economy, raising the risk for a recession that many economists already saw as likely.

Shares in the troubled First Republic Bank slid another 5% early Friday, while KeyCorp, PNC and M&T all fell more than 2%.

Deutsche Bank’s shares plunged as much as14% after an overnight surge in credit default swaps — a hedge against defaults for bond investors. Other European banks also lost ground. Commerzbank dropped 8.7%, Societe General skidded 7.7% and Credit Suisse, itself subject to a government-arranged buyout by UBS, dropped 8.6%. UBS gave up 8%.

Regional banks’ shares in Asia were modestly lower Friday, with HSBC Holdings plc losing 2.9% in Hong Kong while mid-sized Japanese bank Resona Holdings declined 2.6%.

Shares in Japanese energy and electronics company Toshiba Corp. gained 4.2% after it announced late Thursday that it had accepted a $15 billion tender offer from a buyout fund made up of the nation’s major banks and companies. If regulators approve it, the proposed buyout by private equity firm Japan Industrial Partners would be a major step in troubled Toshiba’s yearslong turnaround effort, allowing it to go private.

In Europe at midday, Germany’s DAX lost 2.4%, the CAC 40 in Paris tumbled 2.3% and Britain’s FTSE 100 declined 1.8%.

Tokyo’s Nikkei 225 index lost 0.1% to 27,385.25 and the Kospi in Seoul gave up 0.4% to 2,414.96. Hong Kong’s Hang Seng slipped 0.7% to 19,915.68 and the Shanghai Composite index sank 0.6% to 3,265.65.

Australia’s S&P/ASX 200 shed 0.2% to 6,955.20. Shares fell in Mumbai but rose in Bangkok and Taiwan.

Oil prices fell 3.5% after Energy Secretary Jennifer Granholm said re-filling the U.S. strategic reserves would take years. The Biden Administration released hundreds of millions of barrels from the reserve to counter skyrocketing gas prices after Russia invaded Ukraine.

The reserve has fallen to levels not seen since the early 1980s and some of the price support for crude at around $70 per barrel was based on those reserves being topped off.

U.S. benchmark crude oil dropped $2.45 to $67.51 per barrel in electronic trading on the New York Mercantile Exchange. It gave up 94 cents to $69.96 per barrel on Thursday.

Brent crude, the pricing basis for international oil, lost $2.44 to $73.06 per barrel.

The U.S. dollar fell to 129.97 yen from 130.83 yen. The euro slipped to $1.0742 from $1.0833.

On Thursday, the S&P 500 added 0.3% for its third gain in four days while the Dow Jones Industrial Average gained 0.2%. The Nasdaq composite held up better thanks to strength in technology shares, gaining 1%.