DB stock price drops as rise in credit default swaps draws comparisons to Credit Suisse
Deustche Bank (DB) is among European banks seeing rising credit default swap rates as soaring inflation, rising interest rates and the threat of a Eurozone recession push investors towards a sector of financial markets designed to protect them from the threat of corporate default.
Deutsche Bank and Credit Suisse (CS) are under increasing pressure. Some market watchers believe that credit risk is likely to worsen, placing systemic risk across the sector.
Default probabilities across Europe have increased over the past year more than in other economies. This increases counterparty default risks and raises borrowing costs, making it difficult for banks to raise capital. A problem already encountered by Credit Suisse (CS).
Deutsche Bank (DB) price chart
While German default rates remain well below those of other European countries, comparisons are being made between the two banks. Credit Suisse’s share price has fallen 50% in the past six months, while Deutsche Bank’s stock has fallen 36%.
The two are now said to be trading under “distressed valuations”. According to Marketbeat, the majority of market analysts gave Deutsche Bank a holding rating.
Deutsche Bank faces a bleak economic outlook for the coming months. The value of the German DAX 40 (DAX40) is down 25% since the start of the year. Other European banks such as UBS (UBSG) and HSBC (HSBA) also fell significantly in value.
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UBS (UBSG) Price table
The German economy is one of Deutsche Bank’s main concerns. Russia’s gas-dependent economy has faced a number of challenges in recent months as a result of the war in Ukraine.
Stephen Hare, senior economist at Oxford Economics, said in a note: “German industry may already be in recession and eurozone industrial activity is expected to contract over the next three quarters.”
Default risk in Germany has increased by 203% for the year ahead, almost at a similar pace to the rest of Europe. This led to increases in credit default swap rates, indicating that the market is bracing for the worst.
Are the comparisons fair?
While it is true that the outlook for the German economy is not the best, Deutsche Bank’s fundamentals remain solid. The bank has reported strong financial results in recent quarters and has not been involved in any events that could have affected investor confidence in the business.
The same cannot be said for Credit Suisse. The bank’s involvement in the scandals dates back to 2018, they included spying on executives and lax money laundering controls, which slowly eroded investor confidence.
The new president Axel Lehmann intends to restore the reputation of the bank. Starting with a restrictive plan to be announced later this month.