US Financial Stocks Plummet On Fears of Contagion After Deutsche Bank Selloff

U.S. bank stocks were taking a heavy hit in Friday trading following the sharp pullback in European financial equities, dragged down by the sell-off in Deutsche Bank DB.

Deutsche Bank's U.S.-listed shares fell about 6% after the firm said Thursday  that it will forgo an AT1 call this year, causing a spike on the cost of insuring the bank's debt against failure. 

Deutsche Bank's credit-default swap (CDS) against subordinated notes increased to nearly 600 basis points, the highest level ever recorded for the company, suggesting an implied default risk of 25%.

The Context: The Swiss authorities' decision last week to completely wipe out Credit Suisse Group AG CS AT1 debtholders dramatically impacted the AT1 market.

After the failure of multiple U.S. regional banks and the takeover of Credit Suisse by UBS Group AG UBS, investors scrutinized the banks most exposed to the AT1 segment and the risk of runs on deposits. 

The Bloomberg database shows that AT1 bonds together account for 17.7% of Deutsche Bank's common equity tier one. 

German Chancellor Olaf Scholz reacted to the collapse of Deutsche Bank shares, saying “there is no need to be concerned about Deutsche Bank” since the institution is profitable.

Experts On European Banking Troubles: “It is doubtful that banks will be able to issue new AT1 anytime soon, increasing the likelihood of outstanding AT1 notes being extended,” according to the ING Groep global macro team.

“Refinancing an AT1 would be an extremely difficult exercise in the current market backdrop,” said Suvi Platerink Kosonen, banking credit analyst at ING.

Stuart Cole, head macro economist at Equiti Capital, said: "Deutsche Bank has been in the spotlight for a while now, in a similar way to how Credit Suisse had been. It has gone through various restructurings and changes of leadership in attempts to get it back on a solid footing but so far none of these efforts appear to have really worked."

Adam Johnson, editor of the Bullseye Brief & Fox Business Contributor, said European banks are hard to own given the regions’s credit quality and economy. Despite representing its nation's name, like Credit Suisse, Deutsche Bank has fought for years to reclaim the prestige of its past, he said. 

Andrew Coombs, head of EMEA Banks Sector at Citigroup, said the market is irrational, with the risk of domino effects amplified by media headlines, regardless of whether the initial reasoning was correct.

US Bank Stocks Deep In Red

U.S. bank equities are trading down in Friday's session, with indiscriminate losses across small and major institutions.

The Financial Select Sector SPDR Fund XLF fell 1.6%, underperforming versus other sectors. 

Morgan Stanley MS tumbled 4.5%, trading at levels unseen since the end of October 2022. 

JP Morgan Chase & Co. JPM fell 2.7%, also reaching October 2022's lows. Goldman Sachs GS slipped 2.1%, while Citigroup C was down 3%. 

Wells Fargo & Company WFC slipped 3.5%, returning to mid-February 2021 levels. 

Bank of America BAC dropped 2.3%, now trading at the lowests since November 2020. 

First Republic Bank FRC lost 3.1%. 

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