The analyst on Deutsche Bank’s race: Strange reaction


The big current affairs the news about Deutsche Bank concerns an unexpected announcement that a so-called tier 2 bond will be redeemed at 100 percent of nominal value plus interest on May 24, thus around five years before redemption according to conditions that were set for 2028. Previously such measures have led to improved investor confidence, as it is required that the bank has enough strength to repay bondholders. Deutsche Bank has recently reported strengthened profitability and what industry analysts called a complete turnaround of the bank’s operations, which had been in crisis for a long time. The bank has also refrained from announcing share buybacks for parts of the surplus generated. The reaction to sell the stock was thus completely counterintuitive, several analysts and market strategists noted in comments to financial media on Friday. “Deutsche’s decision to redeem should serve as a reassuring signal to the credit market,” Autonomous analyst Stuart Graham wrote in a note on Friday, according to Bloomberg News.Tier 2 bonds are used to raise regulatory capital. In addition to so-called tier 1 capital, tier 2 capital constitutes the bank’s asset side. These are the primary components of the capital reserve in the banks, but credit quality differs in several ways. Tier 2 capital is to be considered supplementary capital while tier 1 capital is core capital. Tier 2 bonds thus rank higher than tier 1 counterparts. Deutsche Bank’s AT1 bonds, an asset class that has gained attention since the deal where UBS’s acquisition deal with Credit Suisse last weekend where the latter’s AT1s were zeroed, has also fallen steeply. The announcement that Deutsche Bank is redeeming one of its tier 2 bonds coincided with the sharp fall in the share price taking off on Friday. But it is a typical example of how market players sometimes “act first and try to understand the context afterwards”, according to Swiss Flowbank’s market strategist Paul de la Blume. the authorities orchestrated the action with Credit Suisse last weekend,” he told Bloomberg News.The previously mentioned the so-called AT1 bonds that came into focus in the deal are issued by banks to raise additional regulatory security capital (“Additional Tier 1”) to be used as an airbag in the event of a liquidity crisis, when the value of the holders and thus the bank’s AT1 debt can is zeroed. Credit Suisse’s move to zero the AT1 bonds was met with anger as the bank effectively failed to meet the conventional requirements to trigger the dissolution of the debt. However, there were other conditions for Credit Suisse AT1, which made the action possible. However, the matter has contributed to a strong volatility in the entire market for tier bonds, which are sometimes also called “coco-bonds”. The market as a whole includes promissory notes worth around 250 billion euros. Alongside the rout of Deutsche Bank shares and AT1 bonds, the price of the bank’s CDSs, credit swaps bought by bondholders to insure against bankruptcy risk, has also risen sharply. It signals that the market’s belief that the systemically important bank is about to fall has increased. Alongside Deutsche Bank, which plummeted 14 percent, local competitor Commerzbank’s share was down 8 percent. UBS retreated 6.3 percent and France’s Société Générale fell 7 percent. The major Swedish banks were down by a maximum of 2.6 percent, with Handelsbanken at the bottom and Swedbank, SEB and Nordea faring somewhat better.

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