This month has seen various tremors across the banking sector, with the takeover of Credit Suisse coming hot on the heels of the downfall of Silicon Valley Bank. So, is wider turmoil on the horizon? Charlie Buxton, our Head of Investment, shares his thoughts.
The past few weeks have presented some challenging conditions for the banking sector. The downfall of Silicon Valley Bank two weeks ago led to a broader sell-off of banking stocks globally. Focus then turned to Credit Suisse, one of thirty banks deemed to have globally systematic importance.
Investors have had long running concerns over risk management at Credit Suisse, not least around failure of hedge fund Archegos, as well as the bank’s exposure to Greensill Capital. Further issues at the bank then came to a head after it reported that problems had been discovered in its 2021 and 2022 reporting processes. As a result, the Saudi National Bank – Credit Suisse’s biggest backer – said it would not buy more shares in the bank, intensifying scrutiny on a company already struggling after the Silicon Valley Bank news. In addition to this, in February, Credit Suisse had confirmed that clients pulled CHF110bn worth of funds in the fourth quarter 2022, while the bank suffered its biggest annual loss of CHF7.29bn since the financial crisis.
After all of this, despite the Swiss National Bank offering Credit Suisse an emergency CHF50bn credit line, it failed to arrest a steep decline in the bank’s share price, already exacerbated by wider market turmoil caused by the sudden collapse of California-based Silicon Valley Bank.
Against this backdrop, the bank’s share price plummeted, leading to the Swiss Central Bank and the country’s regulators stepping in to negotiate a takeover by Swiss rival, UBS.
How significant is this?
Although Credit Suisse is among the world’s largest wealth managers and most important banks, there were idiosyncratic issues at play here. However, following the global financial crisis in 2008, most banks are now far better capitalised and liquid as a result of tighter regulation in this space. Credit Suisse’s problems were years in the making, particularly given its succession of CEOs, all of whom failed to fully grip risk management.
Looking at the bigger picture, it’s a much improved landscape. Bad loans (which have long been a headwind for eurozone banks) have fallen steadily from over EUR1trillion eight years ago to below EUR350 billion last year, equal to less than 2% of total loans. This should provide markets with some confidence, even if loan issues do creep up in light of higher interest rates.
US banks, also larger entities in themselves, are more stable with a strong consumer base who are less sensitive to market news and whose savings are usually below the USD250,000 limit. This somewhat negates the likelihood of rapid customer deposit withdrawals, which might prompt a domino effect across the sector.
The immediate concerns that investors have about the global banking system have now calmed somewhat, thanks to the interventions of central bankers and regulators. Across Europe things should become clearer in the coming weeks, as customers and markets process the implications of recent events.
How does this change the market outlook?
The events of the past few weeks have seen a shift in interest rate expectations by the Federal Reserve, with markets now pricing in a potentially less hawkish approach, for fear of adding further stress upon the banking sector and, by implication, the broader US economy. This is likely to benefit longer duration assets across both bonds and equities, as well as support Emerging Market equities, which typically benefit from a weaker Dollar.
Gold is likely to benefit too, both as a geopolitical (safe haven) hedge and off the back of a (potentially) more tempered Federal Reserve. Gold has played a key role across portfolios in recent years, with good examples being the first six months of 2020 as Covid-19 first emerged, and then in early 2022, after Russia invaded Ukraine.
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