Shares in Deutsche Bank led a rebound for European financial stocks on Wednesday as bargain hunters moved in after the recent brutal sell-off in the sector.
There were gains across the sector on Wednesday. UniCredit rose 11 per cent in Milan, Société Générale was up 6.8 per cent in Paris and Banco Santander added 5.7 per cent in Madrid.
The buyback plan under discussion was unlikely to involve so-called contingent convertible bonds, or cocos, according to people briefed on the matter. Those securities, along with the bank’s shares, have been the butt of a brutal investor sell-off in recent days.
Wolfgang Schäuble, Germany’s finance minister, and John Cryan, Deutsche’s chief executive, both sought to assuage market fears on Tuesday. Mr Schäuble said he had “no concerns” about the bank, while Mr Cryan said Deutsche’s position was “absolutely rock-solid”.
Investors in financial stocks have been rattled by the prospect of interest rates across the developed world staying lower than forecast last year. On Tuesday, Japan became the first major economy with a sub-zero borrowing rate for 10-year debt as the total of government bonds trading with negative yields climbed to a new peak of $6tn.
Although negative rates are designed to stimulate lending, policymakers have voiced concern about the impact on banks’ profitability. Lenders have been reluctant to pass on the costs of negative rates to customers and have taken almost all of the hit.
Broader investor concerns about the health of the financial sector have coincided with more specific questions about Deutsche’s nascent restructuring programme.
Analysts at Morgan Stanley noted that Deutsche was now the “cheapest globally systemic bank”, but said lingering concerns were likely to weigh on the share price.
“With unresolved litigation . . . weak capital generation, and contingent risks of legacy asset and unknown oil/energy portfolio, we think valuation is not enough to warrant an overweight,” they wrote in a note on Wednesday.
After the bank’s shares lost 9.5 per cent of their value on Monday, and its coco bonds also came under pressure, Deutsche put out a statement reassuring investors that it could pay coupons on the hybrid capital, which are due in April.
Deutsche Bank has plenty of scope for a bond buyback, with €220bn of liquidity reserves. The bank has hundreds of senior bonds outstanding, with a total value of around €50bn as of September 2015, according to the company.
Banks can generate capital gains by buying back bonds at a discount to their face value.
The cost of buying protection to hedge against declining prices for these bonds has rocketed in the past week and the senior five-year euro credit default swap was trading at 242 basis points on Tuesday — its highest level since the end of the eurozone crisis in 2011.
Nicolas Ziegelasch, head of equity research at Killik & Co, said the extent to which fear about the position of European banks had already spread across markets made it “difficult to say if this rally will last”.
He said the worries had reached “from banks’ corporate bonds to credit default swaps to stocks,” and added: “Some of that contagion fear has left the market today, but concern could easily come back about how interlinked all the banks are.”
Reporting by Michael Hunter, Paul McLean, James Shotter, Patrick Jenkins in London; Joe Rennison in New York and Leo Lewis in Tokyo
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