IN OCTOBER 2001, BNP Paribas’ market capitalization edged ahead of Deutsche Bank’s for the first time ever. Since then the gap between the two banks has continued to widen in the French bank’s favour. In the aftermath of 9/11, it is easy to see why investors were inclined to favour the stability of the BNP Paribas business model over the more gung-ho vision at Deutsche Bank, which was unashamedly aimed at challenging the bulge-bracket Wall Street firms.
These investors’ judgement will be fiercely challenged in Frankfurt, given Deutsche’s success since 2001 in delivering on its ambitious return on equity targets. But as one competitor recalls: “By 2002 there was a serious downgrade risk for Deutsche – let alone for Commerzbank and Dresdner – that would have played havoc with its derivatives business.”
By the end of 2002 it was not just downgrade worries and the share price performance of some of the leading German banks relative to their peers that was causing concern. The increasingly liquid credit derivatives market was also speaking volumes, with five-year subordinated credit default swaps having blown out to 450 basis points for Commerzbank and 350bp for HVB by October 2002.