2023-04-27 17:58:44
An Thursday there was a small turnaround for European bank stocks: They were able to regain some ground that they had lost on the previous days due to concerns about the ailing US regional bank First Republic. Deutsche Bank’s share price was driven by good quarterly figures and a more ambitious cost target. On Thursday afternoon, the share had gained more than 3 percent in value to 9.85 euros. In the previous week, however, the price was still above the EUR 10.00 mark. The Commerzbank course also went up 2.0 percent to EUR 10.53. But it had been 10.80 euros in the previous week.
There is a reason for the price losses in the past few days: the American regional bank First Republic is fighting for survival. A look at the recent course of the share illustrates the drama. The price fell 49 percent on Tuesday, only to fall another 30 percent a day later. The panic was triggered by the announcement by the First Republic on deposit withdrawals in the first quarter. These decreased from 176 to 104 billion dollars.
Hoping for a bailout from Wall Street banks
But the actual amount is around $100 billion, because major American banks such as JP Morgan, Bank of America, Morgan Stanley, Citigroup and Goldman Sachs supported the First Republic in an emergency operation a month ago with $30 billion in fresh liquidity. This may also explain why the bank supervisors of the Federal Reserve or the FDIC deposit insurance have so far kept quiet. They hope for a bailout from the big Wall Street houses, which must be interested in a stable market environment.
Market participants have been regarding the American market for commercial real estate with concern for several weeks. The US regional banks are among the most important lenders there. Now the first follow-up financing can be pending, which in view of the increased interest rates and the meanwhile falling valuations of commercial real estate represent something of a litmus test. Professional investors are already bracing for a correction that could derail some regional banks. The rating agency Moody’s is concerned about those institutions with a weak deposit base and low profitability. These could run into funding problems, which could pose a problem for some smaller institutions with high credit exposure to the US commercial real estate market.
Critical US commercial real estate
According to Moody’s, $400 billion in US commercial real estate loans will mature this year. The credit checkers expect the financing conditions to deteriorate in an atypical recession with high interest rates and rising unemployment.
The fact that the major American commercial banks have rushed to the aid of the First Republic underscores the dangers to financial stability. These should not only be limited to the United States, but radiate out to the whole world, including Europe. Deutsche Bank is one of the European institutions most heavily involved in the American commercial real estate market.
Half of its commercial real estate loans totaling EUR 33 billion are in the critical US market. As can be seen from the presentation on the occasion of the quarterly figures published on Thursday, the loans for US office properties, which are currently considered difficult, amount to 4.5 billion euros. Loans of over EUR 0.6 billion will become due here in the further course of the year. In addition, according to Deutsche Bank, 80 percent of these office properties are in good locations (class A).
Speculative attack on Deutsche Bank
But Deutsche Bank stock remains vulnerable as long as concerns about the financial industry smolder. The CEO Christian Sewing knows that too. On March 24, the share price fell by 15 percent after the emergency sale of Credit Suisse to UBS was engineered with the support of the Swiss government over the weekend. James von Moltke, Chief Financial Officer of Deutsche Bank, attributed this price crash to a speculative attack. The trigger was the market for credit default swaps (CDS).
Deutsche Bank’s risk premium (spread) had risen there by more than 2.0 percentage points. Since then the situation has calmed down again. The CDS spread was 1.38 percentage points on Thursday. If you want to protect a claim of 1 million euros from Deutsche Bank against default, you have to pay an annual premium of 13,800 euros. At Commerzbank only 9054 euros would be necessary, at the French BNP Paribas only 7110 euros.
The rating agency Moody’s takes a somewhat more relaxed view of European banks: the analysts rate the unrealized losses, such as those that occurred on bonds during the rise in interest rates, as moderate. The high capital buffers together with the stable deposit base due to the guarantee systems should prevent a case like the collapsed Silicon Valley Bank from occurring. The Californian institute had to sell American government bonds after a large withdrawal of deposits, which led to high losses and thus to a weakening of equity.
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