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Categorized | Capital Markets, Currencies

Deutsche Bank’s coco bonds flash red

Posted on September 30, 2016

©FTGraphics / Getty

The riskiest bonds sold by Deutsche Bank hit a record low on Friday, underlining the anxiety over a lender that is in the crosshairs of investors who have been worried all year about the health of Europe’s banking sector.

Deutsche’s €1.75bn coco bond dropped as much as much as 7 per cent to a record low of 69.97 cents on the euro, sinking beneath the level touched in February when the last major squall about the bank’s health flared.

Designed as an instrument to both bolster banks’ capital levels and ensure creditors take a hit if a lender runs into difficulties, cocos were just one concern on a day in which several signs of financial stress were flashing red.

“Deutsche has enough ammunition to sort itself out,“ said Matthew Cobon, a portfolio manager at Columbia Threadneedle. “The problem more generically is European banks are in a bit of hole and it is difficult to earn their way out of this hole. The market underestimates the sum of individual risks.”

Here is a snapshot of how other assets are reacting and what investors are saying.

European banks

Deutsche shares were the heaviest fallers, sliding as much as 10 per cent to breach the €10 mark, though rival Commerzbank was close behind with a drop of 6.8 per cent.

The wider European banking sector was feeling the heat. By early afternoon trading in London, the Euro Stoxx Banks Index was down 3 per cent, taking its drop for the year to 31 per cent. European stock indices are lower — London’s FTSE by 1 per cent, German Dax lower by 1.2 per cent and French CAC 40 off by 1.6 per cent.

Safe havens

Deutsche Bank chief hits out at ‘forces in the market’

Share price pares losses after initial 9% fall in Germany’s largest lender

The faltering share price of banks’ fanned appetite for havens higher. Gold was up 0.3 per cent to $1,324; eurozone sovereign bonds rose, with German Bunds leading the way. The yield on the 10-year fell 4 basis points to minus 0.15 per cent.

Cost of dollar funding

The euro-dollar cross-currency basis swaps — a measure of the cost of converting euros into dollars — is at its widest in four years, suggesting higher demand for dollar funds. The euro dropped to a two-month low against the Swiss franc and has weakened 0.4 per cent against the dollar to below $1.12.

Short selling

Short-selling activity in Deutsche Bank is picking up, according to the latest data from Markit released on Friday. The percentage of shares out on loan rose to 3.9 per cent on Thursday, up from 3.1 on Wednesday and 2.4 per cent on Tuesday.

Short selling involves paying to borrow a company’s shares, selling them and then buying them back at a profit after they have dropped. Short interest in Deutsche, however, remains below levels seen in early July in the aftermath of the UK’s vote to leave the EU. Then 4.4 per cent of shares were out on loan. This time last year less than 1 per cent of shares were out on loan.

Investors and strategists give their view

“I don’t see Deutsche Bank as a Lehman moment but confidence is fragile and authorities will be keen to stop any systemic risk quickly,” said Alan Wilde, head of fixed income at Barings.

Paras Arnand, head of European equities at Fidelity International, said: “It is about the shape of individual business models. Banks that were able to take restructuring in the immediate wake of the crisis are in better shape. The restructurings are getting more complex over time.”

He added: “Deutsche is clearly at the more complex end of the spectrum. Because the valuations are quite low and the upside on some banks quite high, you don’t need to take on exceptional business risk.”

Kian Abouhossein and Amit Ranjan, strategists at JPMorgan, said of Deutsche that its “inability to adjust the business model to a declining revenue environment is a major problem for an IB-geared bank and has led to the inability to generate retained earnings and hence capital generation in our view”.