Deutsche Bank has had to pay the highest financing rates on the euro debt market for a leading international bank this year, in a further sign of the German lender’s uphill struggle to reduce its funding costs.
The bank raised eyebrows last week when it sold a total of €3.6bn in euro-denominated debt, paying 180 basis points (1.8 percentage points) over the benchmark for a two-year bond, a steep rate for short-term funding.
It also paid 230basis points over the benchmark on a seven-year bond, a higher rate than domestic Spanish lender CaixaBank, which recently raised five-year bonds at 225 basis points, according to capital markets news service IFR.
“Deutsche has to pay significantly higher risk premiums than almost all other large European banks . . . [the] high spreads express severe doubts, mainly triggered by its poor revenue,” said Michael Hünseler, head of credit portfolio management at Assenagon.
Rock-bottom funding
For decades, cheap financing had been the cornerstone of Deutsche’s competitive advantage, with its perception as a “de facto” extension of the German state guaranteeing rock-bottom funding costs that helped it break into the top ranks of global investment banking.
However, post-crisis regulations to protect taxpayers from “too big to fail” lenders have eliminated this edge and more recent capital rule changes now require even senior bondholders to take losses if a bank fails, further pushing up costs. High interest rate payments could price Deutsche out of transactions with some of its most important institutional and corporate clients, analysts say, exacerbating market share declines in key businesses.
The financing cost rises were another headwind for Deutsche, said Barclays analyst Amit Goel in a report, adding that in an “adverse scenario” for funding, the bank could face a 35 per cent hit to its pre-tax profit, significantly more than any other European lender.
There were questions over Deutsche’s decision to tap the debt market with such high rates, despite there being no immediate financing need.
One person close to the bank’s supervisory board called the move “insane” although one banker suggested that the lender needed to demonstrate that it had access to the bond markets.
Cheaper covered bonds
Deutsche executives have been vocal about the need to improve their standing in the debt markets, but have little to show for it so far. “A key priority for us now is lowering our funding costs and improving our credit ratings,” chief financial officer James von Moltke told investors and analysts last week.
Nevertheless the bank said its problems in the debt markets were not materially impacting its business or forcing it to change strategy, pointing out that it was still majority funded by deposits, able to issue cheaper covered bonds and had the capacity to repay all outstanding debts.
A person involved in setting Deutsche’s funding strategy said last week’s financing was small in the context of the bank’s €1 trillion funded balance sheet, although some deals with clients have had to be turned down.
Deutsche’s shares have fallen 45 per cent in the past year amid worries about drops in revenues.
Its problems are also reflected in the credit default swap market. The cost of buying its CDS – derivatives that pay out if a company defaults on its debts — has more than doubled in the past year.The company’s five-year CDS now trades 20 basis points (0.2 ofa percentage point) higher than that of Italy’s UniCredit, which is saddled with billions of euros of bad loans.
In a latest note to clients, Corinna Dröse, a Frankfurt-based bond analyst at DZ Bank, said: “The high spreads reflect [Deutsche’s] high idiosyncratic risk, which is rooted in the lender’s chronic weakness in earnings.
– Copyright The Financial Times Limited 2019.
