Credit Markets Update: Traders see rush for protection on European bank debt

Traders have seen a big increase in demand for debt protection on European bank debt, following a string of results announcements that saw a big increase in bad debt provisions, along with disappointing profits at European banks.

“We never used to trade any banks or insurance companies, but now it’s gone nuts,” said one London-based credit derivatives head at a major US trading house.

Deutsche Bank has seen the bid/offers on its five-year credit default swaps move from 35/55 basis points (bp) on July 29 to 40/50bp today. The bank yesterday reported second-quarter profits before tax of €2.2 billion ($2.17 billion). This was slightly ahead of consensus estimates, but analysts said this was mainly due to one-off items from sales of stakes in industrial holdings, including a €1.6 billion stake in German reinsurer Munich Re. Commerzbank Securities said Deutsche’s underlying operating performance looks weak.

Earlier this week German insurer Allianz issued a profits warning because of bad debts at its Dresdner Bank subsidiary. Meanwhile a number of European banks reported large increases in bad debt provisions. UK bank Barclays reported an increase of 43% to £713 million ($1,120 billion), up from £498 million in 2001.

Five-year credit default swaps on Barclays are currently trading at 21/29bp compared with 23/28bp on Monday. Matthew Barrett, Barclays group chief executive, said: “Although we made good profits, they were lower than in the first half of 2001 because of our decision on provisioning for Argentina and the impact of the market decline on income in our life assurance business.”

But French banks BNP Paribas and Société Génerale saw little movement in spreads this week, despite both banks increasing their bad debt provisions. BNP traded at 30/38bp and Société Génerale at 32/40bp today, compared with 30/40bp and 33/48bp respectively on Monday.