Deutsche Bank and L&G try to banish fears of new credit crisis

Bank and insurer issue statements to soothe investor nerves amid mayhem on markets

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The Independent Online

Two of Europe’s biggest financial services companies, Deutsche Bank and the insurer Legal & General, have tried to calm investor nerves as fears of a rerun of the 2008 credit crisis continued to stalk markets. 

Bosses at Deutsche and L&G issued unscheduled statements addressing the possible fallout from this year’s stock market massacre – in a sign of increasing jumpiness in boardrooms over the darkening mood of investors. 

Deutsche’s chief executive John Cryan told staff that the German lender was “absolutely rock solid” in the wake of a mounting stock market stampede away from the group, which has lost nearly 40 per cent of its value since New Year’s Day.

The statement was triggered by a particularly brutal day on Monday when the shares lost nearly 10 per cent and Deutsche’s hybrid capital – known as contingent convertible bonds (Cocos) –traded at its lowest-ever level as interest costs rocketed.

Insurance on Deutsche’s bond payments, known as a credit-default swap, has also soared in value – signalling deep-seated fears about the group’s balance sheet.    

The bank said that it had enough cash to meet interest payments, but the mood music failed to lift gloomy investors and the shares lost another 4 per cent. 

Markets across Europe have recoiled from a slowdown in Chinese economic growth and a slump in the price of oil, which investors view as a sign of deeper problems in the global economy. 

L&G became the latest victim of the jittery sentiment after it was forced to disclose holdings in a £39bn portfolio of bonds that  back up its annuity book, following requests from investors nervous about what was under the lid.

The insurer, down 25 per cent this year, was briefly the leading performer on the FTSE 100 after investors were given a breakdown of creditworthiness and industry sectors, in an attempt to put to rest concerns it was over-exposed to the beleaguered oil and gas and mining industries. But the 180-year-old group said that just 3.2 per cent of the portfolio was invested in junk bonds, and only 0.8 per cent in oil, gas and mining junk credits. 

Climbing spreads on corporate bonds over base rates and possible defaults in the energy sector had prompted fears among L&G investors about its junk bond investments. Most of the confusion had been sparked by L&G classifying bonds not given a credit score by rating agencies as “unrated,” leading to concerns they were sub-investment grade. Instead it meant they were internally rated by L&G, with the majority being investment-grade quality.

City veterans have been keen to downplay market fears, with the chief executive of the inter-dealer broker Icap the latest to try to dampen speculation about a rerun of the 2008 crisis.  

Michael Spencer said: “We are not entering a new banking crisis. We are going through a real old-fashioned market shake-out. It will be unpleasant but it will be short and sharp. 

“The banks have recapitalised hugely and the system is in much better shape than eight years ago.”