By Amanda Cooper, Sruthi Shankar and Amruta Khandekar
(Reuters) – Banking stocks fell sharply in Europe on Friday with heavyweights Deutsche Bank and UBS Group pummelled by worries that the worst problems in the sector since the 2008 financial crisis have not yet been contained.
Deutsche Bank fell for a third day, sinking more than 11% after a sharp jump in the cost of insuring the German giant’s bonds against the risk of default.
Its shares have lost a fifth of their value so far this month and the cost of its 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 when contacted by Reuters.
The global banking sector has been rocked since the sudden collapse this month of two U.S. regional banks. 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 have spread quickly, and on Sunday UBS was rushed into taking over Swiss peer Credit Suisse AG after the troubled lender 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 UBS’s equity story, which was 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.
Separately, Bloomberg News reported that Credit Suisse and UBS are among banks under scrutiny in a U.S. government probe into whether financial professionals helped Russian oligarchs evade sanctions.
Credit Suisse and UBS declined to comment, while the U.S. Justice Department did not immediately respond to Reuters’ requests for comment.
UBS shares were down 6% on Friday.
The investor pain was spread across the banking sector, with the index of top European banks falling 4.6% 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.
“Looks like the banking crisis hasn’t been entirely put to bed,” Beauchamp said.
DEPOSIT PROTECTION
The falls in Europe followed losses on Thursday in U.S. banking stocks, where investors were looking to see how far authorities would go to shore up the sector, particularly fragile regional lenders.
U.S. Treasury Secretary Janet Yellen told lawmakers 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 U.S. banks JPMorgan Chase & Co, Wells Fargo and Bank of America edged about 0.4% lower in premarket trade on Friday. Shares of regional lenders, the focus of the strongest investor concerns, were mixed.
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.
Standard Chartered Chief Executive Bill Winters said on Friday the wipeout 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 said.
He also told a financial forum in Hong Kong the U.S. Federal Reserve move to guarantee non-insured deposits was a “moral hazard”.
U.S. 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.
Graphic-Regional banks’ market value wiped out https://fingfx.thomsonreuters.com/gfx/ce/lbpggjzgdpq/Pasted%20image%201679594672058.png
(Reporting by Reuters bureaus; Writing Toby Chopra; Editing by Jason Neely and Catherine Evans)
