In late October 2022, the current management team laid out a strategy to transition to primarily a commercial bank and wealth manager. This would take time and involve spinning out Credit Suisse First Boston and reducing certain assets.
The strategic plan was well received by the market, but by this time Credit Suisse had already suffered meaningful – albeit manageable – outflows of deposits, outflows of assets under management, and lower business activity compared to their peers. Its balance sheet strength, as measured by good assets and strong capital, was set to carry it through a restructuring year 2023 with expected losses. At this time, we marked it as weakened and more vulnerable to a market shock or other unexpected events.
The perceived negative comments from the bank’s largest shareholder as well as the the failure of Silicon Valley Bank were sufficient to spread fear among investors which culminated yesterday in a significant sell off. While we will not have the exact outflows of deposits and business until the end of the first quarter, we suspect outflows may be meaningful.
Overnight we had two pieces of positive news:
- the Swiss regulator FINMA and the Swiss Central Bank jointly confirmed their intent to support Credit Suisse with necessary liquidity
- Credit Suisse announced its intention to draw CHF 50Bn liquidity from the central bank under a covered loan facility and a short-term facility.
And finally, while things are still evolving, the factors supporting a positive outcome for senior bondholders are meaningful: not only does Credit Suisse boast strong asset quality, it also fulfils the strong capital requirements demanded by Swiss regulators.
Taking a step back and looking at the overall European banking sector, we believe it is facing the overall economic slowdown from a position of strength. Pushed by highly disciplined European banking regulation, European banks exhibit strong capital and good liquidity positions, further reinforced by their preparedness to meet TLTRO maturities repayments, of which the largest portion is due June 2023.
They do effectively keep about 12% of their total balance sheet in cash and deposits with central banks, thus leaving them ample cushion to meet maturities coming due. The weak spot for European banks is their certain reliance on wholesale funding, but this is offset in most cases by diversified business models, diversified sources of funding and the size and depth of the European covered bond market.
While this reliance has been significantly decreased during Covid thanks to outsized deposit growth across the board, we expect this to go back to normal. We emphasize we are not worried by deposit outflows per se. It is an assessment bank by bank in the light of each one’s business model and funding diversification. It is normal for individuals and especially corporates put their money to work in the aftermath of covid.
The impact for banks will be mainly an impact on interest margins, which saw quite a significant increase in 2022, but which will most likely feel a certain pressure as funding costs will obviously increase.
This analysis was written on March 16th by Cynthia Voorhees, Senior credit analyst, specialized on banking sector and based in the US, part of the Credit Research Team at Ostrum Asset Management
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