Shares of Deutsche Bank AG fell and the cost of insuring debt against default rose in a sudden move that some attributed to hedge funds looking to profit from the wider chaos roiling the financial industry.
German bank shares fell as much as 15% before paring losses to end the day down 8.5% in Frankfurt. There was no clear trigger for Friday’s decline.
But hedge funds have turned their attention to Deutsche Bank, an institution that is strengthening its balance sheet after a series of costly mistakes over the past several years. They have been ratcheting up bets against banks in the stock and credit-default swap market, said investors familiar with the matter, who were not authorized to speak publicly. A spokeswoman for Deutsche Bank declined to comment.
The sale prompted German Chancellor Olaf Scholz to publicly announce the payment, calling it “a very profitable bank.” Speaking at a press conference in Brussels, he also sought to calm market nerves, saying banking supervision in Europe was “strong and stable.”
“This is a clear case of the market selling first and asking later,” said Paul de la Baume, senior market strategist at FlowBank SA.
Banking stocks have been hammered by the collapse of Credit Suisse Group AG and several regional US lenders. The losses continued this week even as Treasury Secretary Janet Yellen said US regulators would be ready for further measures to protect deposits if needed.
The head of Germany’s banking regulator BaFin said on Wednesday that while there was no immediate risk to European banking markets from the new turmoil, there was a danger of “contagion through market psychology.”
Credit default swaps on five-year senior bonds were quoted at about 200 basis points on Friday afternoon, according to ICE Data Services, down from about 220 basis points earlier.
The volume of Deutsche Bank’s CDS quotes sent to market participants this week has increased by 30% compared to the beginning of the month, according to ICE CDS Data. That reflects a surge in demand to buy protection, driven mainly by hedge funds, according to people familiar with the matter.
“We see this as an irrational market,” Citigroup Inc. analysts said. including Andrew Coombs writing in the notes. “The risk is that there is an impact of various media headlines on savers psychologically, regardless of whether the initial reasons are correct or not.”
Short interest in Deutsche Bank hit its highest level since May on Tuesday, according to data compiled by IHS Markit. It stood at 2.6% of shares outstanding there, up from less than 1% at the beginning of February.
“Deutsche Bank’s new CDS widening in our view is related to one trading method of de-risking across all market participants,” wrote analysts at JPMorgan Chase & Co. including Kian Abouhossein. “We do not see this and the associated share price decline as a reflection of fundamentals.”
With the market in a state of anxiety, the view of strength is down as investors see it as a sign of weakness. Deutsche Bank’s announcement on Friday to buy back subordinated bonds came on the first day that the lender had the right to announce. But instead of increasing confidence, these credit default swaps increased.
The bank recently exited a four-year turnaround plan that included thousands of job cuts and exited a large part of the investment bank. CEO Christian Sewing, who took over in 2018, even explored a deal with German rival Commerzbank in 2019 at the government’s urging, before deciding.
Investors are concerned about their exposure to US commercial real estate and their large derivatives books, according to Stuart Graham, an analyst at Autonomous Research. But both are “well-known” and “not terribly scary,” he added in a note.
“We are not worried about the survival or the markup of Deutsche’s assets,” Graham wrote. “To be clear – Deutsche is not the next Credit Suisse.”