Bank shares sink as contagion fears return

March 25, 2023 03:25 PM

Bank shares tumbled Friday, jolting stock markets as fears about the health of the financial sector resurfaced with Deutsche Bank now in the eye of the storm.

Markets had rallied earlier this week after financial authorities took steps aimed at preventing contagion from the collapse of US regional lenders this month.

But sentiment soured following decisions by central banks in the United States, Britain and Switzerland to hike interest rates despite concerns about the impact of the monetary tightening on banks.

Fears of contagion led to the takeover of embattled Swiss bank Credit Suisse by domestic rival UBS on Sunday.

The focus has now turned to another major European lender, Deutsche Bank, whose shares nosedived by as much as 14 percent on Friday, as the cost of insuring against the bank defaulting on its debt spiked. It closed 8.5 percent lower.

The German lender returned to financial health last year following a major restructuring after years of problems.

European officials lined up to reassure the markets.

German Chancellor Olaf Scholz said after a European Union summit that "there is no reason to be concerned" about Deutsche Bank as the lender is "very profitable."

European Central Bank President Christine Lagarde told EU leaders that the single currency area's banking sector is "resilient because it has strong capital and liquidity positions," according to an EU official.

After markets closed on Friday, US President Joe Biden sought to reassure investors, saying banks are "in pretty good shape" following recent financial sector turmoil.

"I think it's going to take a little while for things to just calm down, but I don't see anything on the horizon that is about to explode," he told a news conference in a visit to Ottawa.

But City Index analyst Fiona Cincotta told AFP that the selloff in bank shares has highlighted "just how fragile sentiment is towards the sector."

"As central banks continued hiking rates this week, the outlook is looking increasingly shaky," she said.

European stock markets finished another turbulent week sharply lower, with London down 1.3 percent while Frankfurt and Paris both shed around 1.7 percent.

Wall Street's three main indices opened lower but shook off gloomy banking news from Europe by day's end.

But shares in US financial giant JPMorgan Chase were down 1.5 percent while Citigroup slipped 0.8 percent.

In Paris, Societe Generale sank more than six percent and BNP Paribas dropped more than five percent.

UK bank Standard Chartered also tanked by more than six percent in London while Barclays was down around four percent.

- Oil prices slide -
Concerns that the turmoil could trigger a recession sent oil prices sliding more than two percent.

Share prices in energy majors including BP, Shell and TotalEnergies also slumped.

Global markets were slammed this month by the collapse of three regional US lenders, notably Silicon Valley Bank, which had lost $1.8 billion in the sale of a bond portfolio whose value dropped due to the higher interest rates.

US Treasury Secretary Janet Yellen chaired a meeting of financial regulators on Friday, who heard a presentation from New York Federal Reserve staff on market developments, the Treasury Department said in a statement.

The Financial Stability Oversight Council "discussed current conditions in the banking sector and noted that while some institutions have come under stress, the US banking system remains sound and resilient," the department added.

But "contagion fears are not yet going away," said Finalto analyst Neil Wilson. "It only stops once people stop asking who's next."

- Key figures around 2100 GMT -
New York - Dow: UP 0.4 percent at 32,237.53 (close)

New York - S&P 500: UP 0.6 percent at 3,970.99 (close)

New York - Nasdaq: UP 0.3 percent at 11,823.96 (close)

London - FTSE 100: DOWN 1.3 percent at 7,405.45 (close)

Frankfurt - DAX: DOWN 1.7 percent at 14,957.23 (close)

Paris - CAC 40: DOWN 1.7 percent at 7,015.10 (close)

EURO STOXX 50: DOWN 1.8 percent at 4,130.62 (close)

Tokyo - Nikkei 225: DOWN 0.1 percent at 27,385.25 (close)

Hong Kong - Hang Seng Index: DOWN 0.7 percent at 19,915.68 (close)

Shanghai - Composite: DOWN 0.6 percent at 3,265.65 (close)

Euro/dollar: DOWN at $1.0764 from $1.0840 on Thursday