Finance

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

(Updated )

Investors are starting to worry about more than just profit declines at the biggest banks. They’re increasingly concerned about their ability to repay their debt.

A prime example can be found in Deutsche Bank, which is struggling in the face of falling debt-trading profits and an unclear strategy for increasing income. And investors have yet one more thing to worry about: Souring energy prices pose a risk for substantial losses.

Deutsche Bank may have “significant” energy exposure “that is not investment grade and is not well secured,” Amit Goel and Jag Yogarajah, analysts at Exane BNP Paribas, wrote in a note on Wednesday. They predicted an increase in loan loss provisions that was larger than the average of a consensus of analysts, who forecast a 19 percent rise, to 1.14 billion euros this year.

On Thursday, Deutsche Bank's junior subordinated, 6 percent contingent convertible bonds plunged to 76.5 euro cents from 93.2 at the end of last year. Its lower-ranked euro-denominated debt has lost 3.5 percent so far this year, one of the biggest losers among the biggest issuers of such debt, according to Bank of America Merrill Lynch index data.

Crashing Contingencies
Deutsche Bank's subordinate securities are falling in the face of rising investor concern.
Source: Bloomberg

A similar trend played out in credit-default swaps protecting investors from losses on the bank’s subordinated debt. 

Credit Fears
It's getting more expensive to insure against potential defaults in HSBC's junior debt.
Source: Bloomberg

Deutsche Bank isn’t alone. Derivatives traders are demanding about the biggest payment to protect against losses on HSBC’s subordinated debt since 2012, and the most since 2009 to insure against losses on subordinated debt of Standard Chartered.

HSBC and Standard Chartered both do significant amounts of business in China, which is growing at the slowest pace in a quarter century. Investors are clearly concerned about their exposure to corporate loans in that region, especially at a time when some analysts are expecting trillions of dollars of losses in the wake of souring Chinese debt.

This deterioration in perceived creditworthiness is different than what's going on in stock markets, where financial shares are being pummeled. Shares of Credit Suisse, for example, which reported highly disappointing earnings Thursday, plunged to their lowest levels in more than two decades while swaps tied to its subordinated euro-denominated debt have not immediately risen drastically.

This focus on potential credit risk at some of the biggest banks is a shift from recent years, when they seemed resilient from a credit standpoint even as analysts raised doubts about their future profitability. After all, regulations that prompted them to cut costs and reduce risk-taking would probably make them better able to meet their debt obligations, at least in theory. 

But that theory only goes so far, and not enough apparently to justify buying subordinated financial debt that could get wiped out in a worst-case scenario. Investors seem to be rapidly selling lower-ranked bank securities, particularly notes tied to European firms with significant exposure to commodities companies and borrowers in China. 

Investors really don’t have a sense of just how much pain banks will feel from souring energy prices and the global growth slowdown. Many are not waiting around to find out.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Adds price of Deutsche Bank's junior subordinated, 6 percent contingent convertible bonds and deletes reference to 7.6 percent contingent capital securities.)

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net