Financial journalists only know two quotes from literature. There’s the Hemingway one about bankruptcy, and the Tolstoy one about happy and unhappy families.
In recent reporting on Credit Suisse, most reporters have been choosing the wrong quote. Silicon Valley Bank’s failure might have made it seem like all bankruptcies happen gradually then suddenly but, in truth, every unhappy bank is unhappy in its own way.
Let us count the ways:
1. Unlike for SVB, liquidity isn’t much of a problem
As Twitter’s Johannes Borgen highlighted on Wednesday:
(They sold 30bn of securities in Q4 & you didn’t notice it in their P&L when SVB went bust from selling 21bn and taking a 1.8bn post tax loss)
– The interest rate risk is low – this isn’t a bunch of cowboys taking deposits and YOLOing them on long term bonds. pic.twitter.com/kiqlkuqWFy
— JohannesBorgen (@jeuasommenulle) March 15, 2023
It’s an important point. Run risk ought to be manageable because the high-quality liquid assets (HQLA) portfolios across the entire European banking sector are thicc. As we reported overnight, CS has been able to tap the newly created Swiss National Bank’s liquidity backstop for Sfr39bn while reassuring that the volume of duration fixed income securities “is not material compared to the overall HQLA portfolio”.
CS’s liquidity coverage ratio fell from a 192 per cent average in the third quarter 2022 to as low as 120-130 per cent in the fourth, and that was when market funding was a lot cheaper. Nevertheless, at spot pricing, before taking account of the backstop, the LCR was 150 per cent — which is not great, but not justification to panic either.
2. Unlike for SVB, depositors don’t suffer overly from digitally weaponised herd mentality
SVB was killed by deposit flight among a very small group of customers who all read the same Substacks, chatted in the same Slack groups and mostly took directions from the same overlord.
CS’s latest wobble came after its biggest shareholder put some words in an unfortunate combination when speaking to Bloomberg, and as the commentariat misread elevated CDS prices as a portent of doom rather than a gauge of hedging activity. There’s really not much of a parallel, risk wise.
3. Unlike for SVB, regulation is pre-emptive and probably proportionate
Wednesday’s statement from the Swiss National Bank and the Swiss Financial Market Supervisory Authority spent a lot longer dunking on America than it did pledging support. What might look like chippy jingoism was more likely intended as signal that, at least in the short term, a forcible shutdown isn’t on the cards. The risk of waking up and finding CS equity zeroed has been taken off the table, which has cooled the mood considerably.
4. Unlike for SVB, there’s useful precedent
As well as using the state backstop, CS is making tender offers to repurchase “certain OpCo senior debt securities for cash of up to approximately Sfr3bn”. It’s a similar short-squeeze gambit to the one Deutsche Bank deployed in 2016, to ease jitters over its exposure to a plunge in yields.
According to JPMorgan, CS’s repurchases . . .
. . . should establish a floor under funding levels and with material tender premiums, seeks to drive valuations to more acceptable levels. While we note that tendering for the HoldCo debt with the lower cash prices might have produced a more material impact, the reality is that it would be difficult to tender for instruments that fulfil a regulatory requirement.
5. Unlike for SVB, there’s 167 years of franchise value
That’s not necessarily a good thing, to be clear. There are obvious downsides to having a franchise that’s associated with Archegos, Greensill Capital, Mozambique tuna bonds, Bulgarian money laundering, corporate espionage, etc.
Confidence in CS’s investment bank is widely considered to be shot, optimism about the three-year turnround is fragile, deposit bleed has yet to be stanched, and the wealth management division is losing money, which is the finance equivalent of jumping off a boat and missing the water.
Co-ordinated action to save CS from a run may have bought time to figure out the next move, but probably not much. Here’s what Barclays forecasts:
In terms of our estimates, independent of recent events, we anticipate very material losses in 2023 (CHF4.5bn), and in 2024 (CHF2.9bn), when management is aiming for a break even performance. As such, we see the CET1 ratio dropping below the interim target in 2024 (as a result of losses), but still above regulatory minima at c.12%.
There’s a bear case to make along the lines of “if liquidity’s fine then why is CS drawing down state aid and damaging its franchise?”, to which the answer is probably, “what franchise?” The above is why CS is already on its seventh restructuring plan since 2011, with an eighth likely to be on the way shortly.
6. Unlike for SVB, there are options other than the most drastic one
A full closure of CS’s investment bank would cost about Sfr10bn. It’s something that should be considered, since given point 5 its counterparties have had plenty of time to prepare for the worst.
CS’s prime broking business has already been shuttered and management is quietly rolling off the risk. The bottom line is that CS just isn’t that important to global financial stability any more, which gives the route of an IB closure and the partial float of Credit Suisse Switzerland an appealing elegance. Whether markets have the stomach for another complicated and long-dated restructuring plan is the bigger question, to which the answer is probably no.
7. Unlike for SVB, there is one obvious buyer (even if it may be a reluctant one)
Looking at you here, UBS.
JPMorgan analysts were telling clients overnight that a sale of CS, probably to UBS, was the most obvious outcome. In its scenario the creation of a Swiss national champion would lead to . . .
. . . an IPO or spinoff to NewCo S/Hs of the Swiss Bank worth CHF 10bn as combined market share equals roughly 30% and hence we see too much concentration risk and market share control in the Swiss domestic market; ii) full closure of the IB with CHF 30bn of badwill the IB and group restructuring can be financed ‘through CSG’ itself; and iii) retention of WM/AM. We see material WM overlap especially in UHNW with both UBS and CSG at 55% of AuM in UHNW we estimate as well as overlap in Asia and Swiss onshore business.
[ . . . ]
In our view, Julius Bear would benefit the most gaining advisors and market share in such a scenario involving the restructuring process of UBS-CS. Hence Julius BAER would be our preferred Swiss Wealth Manager currently. For UBS we do believe on an absolute basis even with revenue overlaps, due to the Swiss Bank IPO value creation to S/Hs and badwill creation, a NewCo UBS would be a positive investment proposition in the L-T. We note CSG, with a leverage exposure to Swiss GDP of 84% and UBS at 133%, will also lead to a gold plating of UBS capital and liquidity position.
In terms of European Banks and counterparty concerns as we expressed earlier we are less concerned than at the time DB was in distress or let alone Lehman. Hence we think share price underperformance of wholesale banks such as DBK (4.7x P/E 2024E), BARC (3.9x P/E 2024E), BNP (6.9x P/E 2024E) as well as by some Money Center Banks is overdone. CSG is trading at P/TBV of 0.2x 2024E, UBS is trading at 7.6x P/E and Julius BAER at 9.6x PE 2024E on our forecasts.
At pixel time CS shares are up 20 per cent and financial journalists are strongly encouraged to read other books.
Further reading:
— FT.com/Credit Suisse