Look, my mom always told me, if you can’t say something nice, say nothing at all, and for that
reason I try not to say much about Credit Suisse on my channel. But equally I find when I look at
my old videos, I do seem to keep mentioning them, and I’m not always nice. This morning I realized
that my mom stole that expression from the Disney film Bambi, she just corrected the grammar a bit,
[Insert clip] and I’m not sure that I should go through life following the moral teachings of
an animated rabbit, so I suppose we should (once again) discuss the goings on at Credit Suisse.
Now, most of you (who don’t live in California) probably first heard of Silicon Valley Bank last
week when everything fell apart, but I’m sure you are familiar with Credit Suisse. It’s a big firm.
Last time I checked, it was the eighth largest publicly listed bank in the world by market cap.
Oh, hold on… It’s a while since I checked that… It seems to have lost around 100 billion dollars
in market Cap over the last 15 years (which is bad), and it’s actually the 155th largest bank in
the world today. So, yeah… it is around the size of Webster Financial of Stamford, Connecticut,
which I’m sure is a fine institution. Ok. I can tell from your confused looks that
not all of you have heard of Webster Financial of Stamford Connecticut. Well, what else is there…
Crocs, you know those rubber clogs. Credit Suisse is a bit smaller than Crocs – the company that
makes them. So yeah, Credit Suisse. Maybe they could diversify into the flip flop industry and
eventually be bigger than crocs. Who knows… Anyhow, it hasn’t been a great week for Credit
Suisse. It’s biggest investor was asked earlier this week if he would buy more
stock in the bank by a Bloomberg journalist and he replied “absolutely not.” Here is the clip.
Now I think if he had said “I’d love to, but I’m restricted by various regulations from
doing so” things might have gone a bit better… Absolutely not – was Absolutely
not the best thing to say at a time when people are eyeing banks with suspicion…
So, that wording caused some “jitters” and the share price fell as much as 28% in the
biggest one-day selloff in the stock on record, leaving it down more than 75% over the last year.
Its bonds fell to levels that signal financial distress, with securities due in 2026 dropping
to 70 cents on the dollar. The move sparked a sell-off in both European and US bank stocks
as investors were already on edge due to the bank runs last week in the United States.
Now, I’m not sure if it is true – but I’m hearing the rumor that David, Chamath and
Jason have invited Ammar (the big Saudi investor) to join the “All In” Podcast. As sparking bank
runs has become their new thing now that no one is interested in blitzscaled startups anymore.
So, Credit Suisse bounced back yesterday after receiving a $54bn loan from the Swiss central
bank and instantly announcing plans to buy back about three billion dollars’ worth of their debt
to boost liquidity and calm investors. So far there has been no mention of expanding into
the horrible footwear market. I did mock up this clog in photoshop for them, to try and
help out. I’m not that good at photoshop… I just figured that it might be helpful.
The Swiss national bank giving this credit line to Credit Suisse obviously indicates a
few things things, firstly, that there is no need for a run on the bank, as there will be
enough money for all depositors. Secondly, it signals that the Swiss National Bank and Swiss
regulators have examined the bank and the fact that they are willing to make this loan indicates
that they think that things are OK at Credit Suisse. And thirdly, If Credit Suisse can buy
back a lot of its debt at a discount, this will show as a profit in their accounts. For all its
scandals and mistakes, Credit Suisse did have a strong and liquid balance sheet as of Wednesday.
Now, we’ve seen a few big issues with banks over the last week, the most notable ones being
Silicon Valley Bank and Credit Suisse, these crises are very different to each other, but
are still somewhat linked. Silicon Valley Banks failure can mostly be explained by their failure
to properly manage their interest rate risk. Credit Suisse is in a very different position,
partially because it is classified as a global, systemically important bank and is subject to
tough liquidity rules, capital rules, and stress tests, which SVB was exempt from.
But, all of the prudential banking rules might have prevented Credit Suisse from the financial
problems that Silicon Valley Bank succumbed to, but Credit Suisse has instead been plagued
by repeated scandals. From spying on a former employee, a criminal conviction for allowing drug
dealers to launder money, a massive leak of client data to the media, Archegos, Greensill, Mozambique
“tuna bonds” the list is too long. You would maybe even think that this willingness to break laws and
skirt regulations would add to the profits at Credit Suisse, but no, they have managed
to be involved in every scandal and always lose money. On a serious note though, these scandals
show systematic failures in risk management at the firm, which destroyed the bank’s reputation
and ultimately hit the firm’s bottom line. Credit Suisse released their annual report
on Tuesday, announcing in it that “management did not design and maintain an effective risk
assessment process to identify and analyze the risk of material misstatements in its
financial statements”. Going on to say that its full-year 2022 results, were unaffected by this.
So, while the situations are very different at Silicon Valley Bank and Credit Suisse,
they are both huge failures of risk management. The loss of reputation at Credit Suisse over the
years has led to an exodus of their most talented staff. The best bankers don’t want to walk around
with Credit Suisse printed on their business card – it doesn’t help to attract business and it does
nothing for their resumes. The bad reputation will have equally made it more difficult to
attract any new business. Why would someone choose to deal with Credit Suisse when there
are other reputable banks they could do business with. Wealth Management customers appear to have
lost faith in the firm too. The wealth management business suffered from over 100 billion dollars
in outflows in the final quarter of 2022. The actions of the Swiss National Bank mean
that disaster has been averted for the time being, but Credit Suisse is possibly still critically
wounded. Their bonds slid further yesterday. One of their dollar bonds maturing in 2027 gave up its
gains to trade down almost 5 per cent on the day to 66 cents on the dollar. Another dollar
bond maturing in 2028 slid 13 per cent to just below 64 cents. These bond declines came despite
a rebound in the bank’s shares on Thursday. Prices below 70 cents on the dollar are generally
considered to be a marker of distress. The same bonds had been trading in the 80s and 90s,
respectively, as recently as Monday this week. Some of the share price recovery was
possibly driven by short covering, as the short thesis is a lot weaker now that the
Swiss National Bank is backstopping the firm. There are a number of reasons to believe that
the European banking system is in much better shape to weather the stresses of the current
banking environment than US regional banks of similar size. As Dan Davies of Frontline
Analysts argues in the FT, “This is not because European banks are very good — it is precisely
because they have historically been quite bad”. A regulatory filing published by the French bank
BNP Paribas on Tuesday, shows that its profit and loss account has very little sensitivity to
interest rate movements. The Spanish bank BBVA as another example, has hardly any sensitivity
of its shareholders’ funds to interest rates. As Davies points out, practically every banking
regulation in existence commemorates a time when things went badly wrong, and Europe spent a decade
toughening up banking regulation because it went through a rolling multiyear euro crisis.
The European regulators have a detailed set of standards for testing interest rate risk,
with the idea that they will be applied to every significant bank in Europe. Unrealized losses are
not ignored under this regime and the global Basel standards on stable funding are applied
across the entire banking sector. This is quite different to the regulations applied to community
banks in the United States who lobbied the government for regulatory exemptions over
the years. European banks have underperformed US banks since the credit crunch, largely driven by
this additional regulatory burden that they face, but the idea is that if regulators are going to
agree to bail out banks from time to time, they should reasonably put restrictions in place as
to how much risk these banks are allowed to take. The economist Matthew Klein argued in a blog post
that banks today can be seen as speculative investment funds grafted on top of critical
infrastructure, and that this structure is designed to extract subsidies from the rest
of society by threatening civilians with crises if the banks’ bets are ever allowed to fail. He goes
on to argue that the U.S. government’s response to the collapses of Silicon Valley Bank and Signature
Bank—effectively removing the cap on deposit insurance while letting lenders borrow relatively
cheaply against fictitious asset values—is a reminder that those threats usually work.
Now, while Credit Suisse’s balance sheet was reasonably strong, unlike the US banks
that collapsed last week, its reputation was obviously not. The unending list of scandals,
most of them coming from the firm’s senior management and its investment banking division,
have destroyed the once impressive brand. This loss of reputation has driven away top
talent and the firm’s customers - collapsing profitability. We have seen this week that
this profitability issue, in a climate of fear, can put a firm like Credit Suisse on the rocks.
So, what might happen next? With the Swiss National Bank backing Credit Suisse and with
its balance sheet in decent order, it seems highly unlikely that liquidity issues will
sink the ship. This makes a Silicon Valley Bank style bank-run way less likely. But
while a central bank can provide liquidity, it can’t provide a good business model, and that is
what Credit Suisse needs. Customers have to see a good reason as to why they should choose to deal
with a tarnished brand like Credit Suisse. The Swiss national bank does have the tools
to prevent an immediate bank failure, but the management of Credit Suisse has to find a way
of turning around the firm’s reputation and its profitability, which are linked. For investors,
the bank’s liquidity is not its fundamental problem, instead they worry that its business
model is simply unprofitable. The current CEO has been in his role for less than a year and
has a difficult path ahead of him. In October he announced a restructuring plan to cut costs,
reduce the size of the workforce and sell part of the securitized products unit to
Pimco and Apollo. He additionally outlined plans to spin off the capital markets and
advisory business over the next three years under a rejuvenated CS First Boston brand.
The options on the table if things continue in their current direction include tearing up this
restructuring plan, spinning off its Swiss unit, a full takeover by another bank or, in a worst-case
scenario, the resolution of the bank. In a call with clients on Wednesday,
JPMorgan analyst Kian Abouhossein said that Credit Suisse’s most likely destiny
was a takeover by its Swiss rival UBS. Now, a merger between Switzerland’s two largest banks
has been discussed for quite some time but has been seen as unlikely for antitrust reasons.
The current situation has led to speculation that such a takeover could occur if regulators
felt it was the best way of stabilizing one of the country’s most important financial institutions.
Under a more extreme scenario, some are arguing that the central bank could step in to guarantee
the deposits, take full control of the business, sell it off in pieces and wind the rest down.
This would be politically difficult, especially if Swiss taxpayers were to take a hit,
not to mention the embarrassment of one of the country’s biggest companies being brought down.
So anyhow my suggestion for Credit Suisse – which I feel is a good one - is less banking,
more rubber clogs… It works for the crocs people and it’s the banking thing that seems
to keep getting Credit Suisse in trouble. If you enjoyed this video, you should watch
my video from last October on whether Credit Suisse is the next Lehman Brothers or not.
Have a great day and see you in the next video. Bye!