NatWest, Lloyds, Barclays, ING retreat as Deutsche Bank shares dive

European bank stocks plunged hard on Friday as investors continued to derisk following the collapse of Credit Suisse and several other banks in the United States. These equities also plunged after their credit default swaps (CDS) dropped, signaling that investors are afraid about the industry. In the UK, the NatWest (LON: NWG) share price led a drop in the FTSE 100 index.

Exit Credit Suisse, enter Deutsche Bank

Lloyds (LON: LLOY), Barclays, Standard Chartered, and HSBC share prices plunged by over 4% on Thursday. Elsewhere in Germany, the Deutsche Bank stock price dropped by over 10% as concerns about the German lender intensified.

Elsewhere in Europe, stocks like Unicredit, ING, Societe Generale, and UBS all dropped by over 4%. At the same time, their CDS, which is the cost of insuring their defaults, plunged, signaling that investors are still afraid of the banking sector. 

The main catalyst for this price action is that we are heading to the weekend again. And investors have a good memory of what happened in the past two weekends. Last weekend, Swiss regulators created a deal that saw UBS acquire Credit Suisse almost for free. The deal also wiped down the company’s bonds worth more than $11 billion. 

In the previous weekend, American regulators decided to shut down Signature Bank and Silicon Valley Bank. As such, there are concerns that the situation will repeat once again this weekend.

Deutsche Bank is one of the most vulnerable European banks because the management is actively implementing a turnaround strategy. To a large extent, this turnaround has been successful as the company has returned to profitability. 

The most recent results showed that the bank’s profit before taxes rose to 5.6 billion euros in 2022 while net revenue jumped to 27.2 billion euros. Its CET ratio stands at 13.4% while leverage exposure dropped by 43%.

ECB and Fed hikes

Another likely reason why European bank stocks are crashing is that American regulators were investigating Credit Suisse and UBS. This investigation centers on whether the banks helped Russian oligarchs evade sanctions. It is still to early to predict the outcome of the investigations and whether more European banks will be added to the list.

Meanwhile, the Federal Reserve and the European Central Bank (ECB) have continued to implement interest rates. The Fed hiked by 0.25% while the ECB increased by 0.50% last week. More rate hikes could lead to strains in the banking sector.

Still, I believe that European banks are well capitalized, thanks to the reforms that happened during the last Global Financial Crisis.