Analysts Confirm Deutsche Bank Not Following Credit Suisse as Panic Spreads24 March, 2023 9:50 AM
Deutsche Bank has become a target of market panic, as its shares slid and the cost of insuring against its default spiked. Despite posting 10 consecutive quarters of profit, boasting strong capital and solvency positions, and undergoing a multibillion euro restructure aimed at improving profitability, Deutsche Bank is still facing investor jitters about the stability of Europe's banks. This comes after the emergency rescue of Credit Suisse by UBS and further monetary policy tightening from the US Federal Reserve, triggering contagion concern among investors. Despite the reassurance from German Chancellor Olaf Scholz that there is no basis to speculate about Deutsche Bank's future, analysts are left confused as to why the bank is being targeted.
Deutsche Bank's Concerns Dismissed by Research Firm Autonomous as Not Scary
Research firm Autonomous, a subsidiary of AllianceBernstein, has dismissed concerns about Deutsche Bank's US commercial real estate exposures and substantial derivatives book as "well known" and "just not very scary". They pointed to the bank's "robust capital and liquidity positions" and emphasized that Deutsche is "solidly profitable", with a forecasted return on tangible book value of 7.1% for 2023, rising to 8.5% by 2025. The firm clarified that they have no concerns about Deutsche's viability or asset marks, and that their "Underperform" rating is simply driven by their view that there are more attractive equity stories elsewhere in the sector.
JPMorgan: Three Causes Led to Credit Suisse's Collapse, Including Fresh Focus on Liquidity Risk
According to JPMorgan, Credit Suisse's collapse was caused by a combination of three factors, including governance failures eroding confidence in management, a challenging market backdrop hampering the bank's restructuring plan, and the market's "fresh and intense focus on liquidity risk" following the collapse of SVB. The importance of the environment in which Credit Suisse was trying to overhaul its business model could not be understated, JPMorgan argued, as illustrated by a comparison with Deutsche Bank. The German bank had its own share of headline pressure and governance fumbles, but JPMorgan noted it had a far lower quality franchise to begin with and had relied on its FICC trading franchise for organic capital generation and credit re-rating. Though significantly less leveraged today, Deutsche Bank still commands a relatively elevated cost base.
In comparison to Deutsche Bank, Credit Suisse still had a high-quality Asset and Wealth Management franchise, as well as a profitable Swiss Bank, despite the struggles of running a cost and capital-intensive investment bank, according to JPMorgan strategists. However, recent events have proven that such institutions rely entirely on trust, and Credit Suisse's governance failures led to investor outflows in the Wealth Management division, resulting in deepening P&L losses. Credit Suisse was already facing scrutiny over its liquidity position and had suffered massive outflows in Q4 2022 before the collapse of Silicon Valley Bank.
In light of Credit Suisse's collapse and unprecedented depositor outflows, JPMorgan noted that it was unclear whether the outflows were driven by a fear of those outflows and a "lack of conviction in management's assurances," or if the Swiss bank had amassed them themselves following SVB's failure. The note highlighted that recent events have shown that regulators will always go to great lengths to protect depositors, underscoring the importance of confidence for investors and issuers alike. The lesson for them is that transparency in otherwise opaque liquidity measures is crucial, as well as deriving confidence from the market backdrop or management's ability to provide transparency.