Financial journalists know only two excerpts from the literature. Hemingway is one about bankruptcy, and Tolstoy is about happy and unhappy families.
In recent reporting on Credit Suisse, most reporters have been Choosing the wrong quote. The failure of Silicon Valley Bank might make it seem like all bankruptcies happen gradually then suddenly but, in truth, every unhappy bank is unhappy in its own way.
Let’s count the ways:
1. Unlike for SVB, liquidity is not much of an issue
As Twitter’s Johannes Borgen highlighted on Wednesday:
I’ve done my fair share of dunking on CS in the past, so let me point out two big things that make infection from SVB bitabsurd:
– CS has a very large amount of liquidity (still 62bn in central banks) and was able to manage Q4 100bn+ deposit outflows without MtM losses.
— Johannesborgen (@jeuasommenulle) March 15, 2023
It is an important point. Running risk should be manageable as high quality liquid assets (HQLA) portfolios are thick across the European banking sector. As we reported overnight, CS was able to tap the liquidity backstop for the newly created Swiss National Bank’s Sfr39bn while guaranteeing that the volume of fixed income securities in the period was “not material compared to the overall HQLA portfolio”.
CS’s liquidity coverage ratio fell from an average of 192 per cent in the third quarter of 2022 to as low as 120-130 per cent in the fourth and that was when market funding was much cheaper. However, on spot pricing, before taking into account the backstop, the LCR was 150 per cent – not great, but also nothing to panic about.
2. Unlike SVB, depositors do not suffer too much from the mob mentality armed with digital weapons.
A very small group of SVB customers were killed by a deposit flight that everyone read Same substacksChatted in the same Slack groups and took directions from mostly Same owner.
CS’s latest shake-up came after its largest shareholder put some words to the unfortunate combination when speaking to Bloomberg, and commentary misread CDS prices as a sign of doom rather than a measure of hedging activity. There really isn’t much parallel, risk-wise.
3. In contrast to SVB, regulation is ex ante and probably proportionate
Tuesday’s statement from the Swiss National Bank and the Swiss Financial Market Supervisory Authority took much longer than promised to support the US. What may seem like chippy jingoism is more likely a sign that, at least in the short term, a forced shutdown is not on the cards. The risk of waking up and finding CS equity zero has been taken off the table, which has cooled the mood considerably.
4. A contrast to SVB is a useful paradigm
As well as using the state’s backstop, CS is offering a cash tender to repurchase “certain OpCo senior debt securities for cash of up to approximately Sfr3bn”. It’s a similar gamble Deutsche Bank deployed in 2016 To ease the fear of exposure to a dip in yields.
According to JP Morgan, the repurchase of CS. . .
. . . A framework should be established under funding levels and with material tender premiums, attempting to drive valuations to more acceptable levels. While we note that tendering for holdco debt with lower cash prices could create a more material impact, the reality is that it will be difficult to tender for instruments that meet the regulatory requirement.
5. In contrast to SVB, the franchise has 167 years of value
That’s not necessarily a good thing, to be clear. There are obvious downsides to being a franchisee Archagos, Greensil CapitalMozambique Tuna Bond, Bulgarian Inappropriate manipulation of money, Corporate espionageetc
Confidence in CS’s investment bank is widely believed to be shot, optimism about a three-year turnaround is slim, the deposit bleed has yet to be staunched, and the wealth management division is losing money, which is tantamount to jumping off the boat and losing money. Water is missing.
A concerted action to save CS from the run might have bought time to figure out the next move, but probably not much. Here’s what Barclays predicts:
In terms of our estimates, independent of recent events, we expect very material losses in 2023 (CHF4.5bn) and 2024 (CHF2.9bn), while management aims for break even operations. As such, we see the CET1 ratio falling below the interim target in 2024 (as a result of losses), but still above the regulatory minima at c.12%.
“If liquidity is fine then why is CS withdrawing state aid and hurting its franchise?” There is a bear case to be made along the lines of, the answer to which is probably, “What franchise?” The reason for the above is that CS is already on its seventh restructuring plan since 2011, with the eighth plan likely to follow soon.
6. In contrast to SVB, there are options other than the strictest
A complete closure of CS’s investment bank would cost around Sfr 10bn. That’s something to consider, because given a point 5 his counterparts have plenty of time to prepare for the worst.
CS’s prime broking business has already been shut down and the management is quietly taking risks. The bottom line is that CS is no longer that important to global financial stability, which gives the path to IB closure and the partial float of Credit Suisse Switzerland attractive elegance. Whether there is an appetite for markets other A complex and long-term restructuring plan is the biggest question, the answer to which is probably no.
7. Unlike for SVB, there is an obvious buyer (albeit a reluctant one).
Seeing you here, UBS.
JPMorgan analysts were telling clients overnight that a sale of CS, perhaps to UBS, was the most obvious outcome. His scenario would lead to the creation of a Swiss national champion. . .
. . . IPO or spinoff combined market share for Swiss bank NewCo S/Hs worth CHF 10bn is around 30% and we therefore see very high concentration risk and control of market share in the Swiss domestic market; ii) full closure of IB with CHF 30bn to be financed ‘by CSG’ itself for IB and group restructuring; and iii) maintenance of WM/AM. We see particularly material WM overlap with both UBS and CSG in UHNW at 55% of AUM in UHNW as well as estimating overlap in the Asia and Swiss onshore businesses.
[ . . . ]
In our view, Julius Baer would benefit the most leveraged advisors and market share in such circumstances involving the restructuring process of UBS-CS. Julius BAER will therefore be our preferred Swiss wealth manager for now. For UBS we believe on an absolute basis even with the revenue overlap, NewCo UBS will be a positive investment proposition in LT due to the Swiss bank’s IPO value creation and badwill creation for S/Hs. We note that CSG, with leverage exposure at 84% of Swiss GDP and UBS at 133%, would also lead to gold plating of UBS capital and liquidity positions. In terms of European banks and counterparty concerns as we expressed earlier we are less concerned than when DB was in trouble or let alone Lehman. Hence we think stocks of wholesale banks like DBK (4.7x P/E 2024E), BARC (3.9x P/E 2024E), BNP (6.9x P/E 2024E) as well as some money center banks are undervalued. . We estimate CSG is trading at a P/TBV of 0.2x 2024E, UBS is trading at 7.6x P/E and Julius BAER is trading at 9.6x PE 2024E.
CS shares are up 20 percent at pixel time and financial journalists are strongly encouraged to read other books.
Further reading:
— FT.com/Credit Suisse
