Deutsche Bank, European Peers Slide, Showing Sector’s Crisis Far From Over

Shares in Germany’s largest lender led declines across the European banking sector on Friday, in a clear signal that last weekend’s massive merger of Switzerland’s largest banks did not put investors’ anxiety about the sector to rest.

Deutsche Bank DB fell as much as 15% in the first hours of trading in Frankfurt (down 8.2% for U.S.-listed shares), hitting a five-month intraday low and extending losses for the month of March, which has been defined by parallel confidence crises in U.S. regional banks and Switzerland’s Credit Suisse, to 32% (29% in the U.S.). Regional peers were also down, with BNP Paribas BNPQY falling 6.3% (7.4% in the U.S.), Societe Generale SCGLY down 6.8% (8.4% in the U.S.), and Commerzbank CRZBY down 7.7% (6.74% in the U.S.).

“After the disappearance of Credit Suisse as European banking’s problem child, many investors are looking for the next-worst bank to avoid,’’ Morningstar banking analyst Niklas Kammer said Friday. “Where are large, inscrutable investment banking exposures? Where are the profitability challenges? Deutsche Bank and Commerzbank will be popular answers due to their troubles in recent years.”

Societe Generale and BNP Paribas also have sizable investment banking operations. Meanwhile, Commerzbank remains in the middle of a restructuring in a market segment that is already seen as offering poor profitability, and it has made unambitious profitability forecasts, Kammer said.

Investors Jittery

Friday’s deep declines have erased a sectorwide rebound during the first half of the week, which had followed the merger between Switzerland’s two largest banks, putting an end to paralyzing uncertainty about the survival of Credit Suisse.

“Investors are clearly jittery,” Morningstar European equity strategist Michael Field wrote in a note on Friday. He cites a surprisingly weak German manufacturing purchasing managers’ index reading this morning, as a result of which exposure to Germany “is seen as a negative right now.” Despite Deutsche Bank’s ambitious restructuring under CEO Christian Sewing, “there is still some investor skepticism around the quality of the bank. So when banking shares are being beaten up, as they are today, Deutsche will likely take it worse than peers.”

Likewise, Niklas Kammer says Deutsche Bank’s turnaround has not yet been completed. “Poor risk compliance seems to remain a structural issue,” he said. “When potential investors ask themselves which bank definitely won’t have skeletons in the closet, Deutsche Bank won’t be their first pick.”

The latest selloff followed a redemption offer by Deutsche Bank for AT2 bonds, usually a gesture that inspires investor confidence. Credit Suisse had attempted a similar maneuver when it announced the Swiss National Bank’s liquidity lifeline on March 16, offering to buy back senior dollar and euro debt.