Why Deutsche Bank is not next Credit Suisse?
On Friday (24th March 2023), there was a tumble in Deutsche bank shares, which sank to 8.22%, after the price of insuring the bank’s debt from default surged to more than four years high. Many investors started panicking and many analysts started questioning whether the Deutsche Bank will be the next Credit Suisse. As we are all aware that UBS has bought Credit Suisse last week. This article will provide reasons why Deutsche Bank is not the next Credit Suisse. So let’s get started.
A brief History of Deutsche Bank (DB)
Deutsche Bank (DB) originated in 1870 in Berlin. The bank was founded on the basis of “the transaction of banking business of all kinds, in particular the promotion and easing of trade relations between Germany, the other European countries and overseas markets”. In other words to develop, support and expand Germany’s investments and trade with the rest of the world. Thus Deutsche Bank, right from its origin, itself became an international institution.
DB is Germany’s prime lender with an asset value of about 1.337 trillion euros (in $ 1.448 trillion) in the last year (i.e. at the end of 2022). During last year (i.e. 2022) it earned a PBT (profit before tax) of 5.6 billion euros ($ 6.04 billion).
Why DB is important?
The bank is widespread across the world showing its presence in 58 countries with a labour force of 84,000 staff. DB is one of the 30 important banks across the globe, where the regulators monitor more closely to maintain financial stability. DB is one of the major universal banks which do provide lending to households and businesses along with providing advice on corporate mergers and trading securities for big investors.
Why did DB stocks got hit?
The late last year, many individual investors took to social media to spread how the Credit Suisse Bank’s shares are tumbling and stated that it will be the next Lehman Brothers – the U.S. investment bank that collapsed in 2008. Since Individual Investors are also social media influencers the idea of the market spreads rapidly. Now the same thing is happening with Deutsche bank. The surging prices on credit-default swaps echoed the concern of these online commentators. The rise in prices shows that there is trouble in the banking system as well as chaos in riskier European debt. These things have concerned the investors who feared that it would be the next Credit Suisse.
What is Credit Default Swap (CDS)?
CDS are financial derivative contracts which allow the investors to hedge themselves or to swap their credit risk with another investor. In other words, it is a credit derivative which protects the buyer against default and other risks.
Is DB Really at Risk/Trouble?
First of all, DB is not at all in a risk position (at least as of now). Second, the tough times are not new for DB. DB reinvented itself, after many years of the global financial crisis in 2008. It was seen as one of the biggest basket cases in the Industry. DB has overcome troubles like enduring losses, big fines, executive turnover, restructuring, and also it has passed an acute crisis of investors’ confidence in 2008.
Does a Sell-off of DB was on the Card?
Yes, the German Government was supportive of even a potential merger with DB’s rival Commerzbank AG.
Is DB the next Credit Suisse?
First of all the apprehension of the move of sell-off was itself irrational. There are two main reasons why DB is not the next Credit Suisse and they are:
First, the DB has posted a PBT (profit before tax) of 5.6 billion euros ($ 6.04 billion), this is the highest profit since 2017. This is completely in contrast to Credit Suisse – as it posed the full year loss of 7.3 billion Swiss Francs. The differences between these two banks are starker.
Secondly, in 2022 the DB’s liquidity coverage ratio was 142%. This means that it has enough liquid assets to cover sudden cash outflow for at least 30 days. Whereas in the case of Credit Suisse, the bank failed to meet the liquidity coverage ratio.
Conclusion
It is clear that DB is not in trouble and it is surely not Credit Suisse. Not only that on Monday (i.e. 27th March 2023), DB AG stock regained some of the ground that it lost on Friday (i.e 24th March 2023). The bank stocks contributed to a rebound in European Indexes after the last week’s tumult trade. Hence, it is pretty clear why Deutsche Bank is not the next Credit Suisse.
