Deutsche Bank slides after spike in credit default swaps

Deutsche Bank shares tumbled on Friday as the cost of insuring against its default spiked amid lingering concerns about the European banking sector.

At 1205 GMT, the shares were down 13.7% at €8.06. Pricing for credit default swaps - a form of insurance against default for a company’s bondholders - jumped to 173 basis points on Thursday night from 142 basis points a day earlier.

Other bank shares were also sharply lower, with Credit Suisse and UBS down 7% and 6.5%, respectively. Commerzbank fell 8.4%, while Societe Generale lost 7%. Meanwhile, the Stoxx 600 banks index was 5.2% weaker at 136.70.

On Thursday, Bloomberg reported that UBS and CS were among banks being looked at in a US Justice Department investigation into whether financial professionals had helped Russian oligarchs to evade sanctions.

Neil Wilson, chief market analyst at Markets.com, said: "Deutsche Bank announced its decision to redeem its $1.5bn Fixed to Fixed Reset Rate Subordinated Tier 2 Notes due 2028 at 100%. These bonds surged to more than 98 cents on the dollar, having slipped to 90 cents...but there is a sense that markets are asking why are you doing this? Are you trying to proclaim strength to hide something? Early redemptions can be viewed as negative signal that it expected dovishness to come.

"DB is not entirely dissimilar to Credit Suisse - years of pain and restructuring - we were always joking that CS was the new DB. Is DB the new CS? Bill Winters at Standard Chartered points out that the treatment of the AT1 bonds of CS will be profound and I think some of the price action we are seeing around DB assets today is a reflection of investors needing to view those bonds as not as safe as equity.

"This is the sort of unanticipated consequence of the CS bailout/forced marriage that I mentioned this morning and earlier this week - Merton’s reason number three: Immediate interests overriding long-term interests."

Oxford Economics said in a research note: "The eurozone economy is in a state of high alert, as investors continue to digest the turmoil affecting the banking sector in recent weeks. While risks of systemic contagion still look limited, sentiment indicators are already reflecting the increased concerns about the health of the financial system and the impact of rising interest rates.

"With no economic data yet available to reflect the impact of the turmoil on the real economy, we'll have to wait to gauge the full effect on activity. But the tightening in financial conditions that has already occurred will certainly have an impact on growth over the coming quarters."