Last week saw a continuation of the turmoil in the banking sector, with a bad start to the week on Monday as Credit Suisse had to be rescued. After having witnessed this extraordinary event, what is the current status quo?

On the US banking side, things remain comparably controlled for the large, systemically important banks given solid balance sheets with high levels of liquid assets and excess deposits. On the US regional banking side, deposit outflows continued pouring into large banks and money market funds, as the market is still awaiting an uncapped deposit guarantee for the system. Partial damage is already done on the loan side, as volumes might shrink at regional banks and affect credit availability for commercial real estate. Increasing credit losses might follow, but they should be concentrated around regional banks. Things seem calm at the large European banks, as they are flushed with sticky deposits and own high levels of shorter-duration liquid assets.

Nonetheless, market angst persisted during the week as investors looked out for the ‘next Credit Suisse’. On Friday, credit spreads of Deutsche Bank (Buy, Price/Target: EUR 8.54/13) spiked shortly over the 200bps level due to concerns about its commercial real estate loan exposure (7% of total loans, hereof half to the US), which seems higher than European peers but manageable in our view (1% write -down equivalent to 0.4% equity reduction).

With the latest decline in European bank shares, valuations of the subsector reached the same trough levels last seen during the Global Financial Crisis (2008), the European Debt Crisis (2012), and the Covid -19 crisis (2020). Meanwhile earnings expectations have stayed far superior compared to the broad European equity market (+11.7% vs -0.5%), as European banks benefit from the tailwinds of higher yields. This begs the question as to what extent the profitability of banks is affected by the latest crisis of confidence, which led to higher funding costs and deposit outflows, eventually leading to a tightening of credit standards.