The UBS-Credit Suisse Deal and European Banks – More Trouble Ahead

  |   Market View, Geopolitics, Macro

The Demise of Credit Suisse – No Relevant Player has Apologized nor Resigned

The reputation of Switzerland as a financial center and even as a country is at stake. In the aftermath of the UBS-Credit Suisse shotgun marriage cum bailout the blame game is steadily escalating. As of yet, however, no relevant player has assumed responsibility nor apologized (e.g. Credit Suisse), let alone stepped down (e.g. FINMA).

The Swiss population at large was utterly unprepared and shell-shocked by the collapse of Credit Suisse. Representative opinion polls show a broad and strong consensus that Credit Suisse’s collapse is largely self-inflicted and, former and current Credit Suisse leadership is to blame and should be held accountable.

And the Winner is – UBS

The clear winner is the emerging ‘Monsterbank’ UBS, in many ways eager to get the deal done. Now, however, UBS has to treat carefully to avoid appearing to have taken undue advantage of the dire circumstances.

We expect the UBS-Credit Suisse situation further evolving given the trade off between carving-out and selling parts of Credit Suisse versus facing significantly tougher regulation and political restrictions imposed. We wouldn’t be surprised to see the Credit Suisse bank re-emerge focusing on solid Swiss business. That could be a winning formula for all stakeholders.

Beware of Further Casualties from Credit Suisse’s Business Portfolio

In regards to a still tightening macroeconomic environment, there is still clear and ongoing danger of negative 2nd round effects. Rising volatility, risk aversion, tightening interest rates and the lagging effects across the economy and the financial system could lead to further corporate casualties and significant write-offs emerging from within Credit Suisse’s business and investment portfolio.

Mandatory Swiss Passports for Swiss Bank Leaderships – Why?

Switzerland will hold federal elections in October 2023. In this context, the Credit Suisse collapse is being highly politicized and various parties ask for consequences – ranging from sensible proposals about minimizing investment banking and increasing capital requirements to absurd requests from the Swiss nationalist party (‘SVP’) such as the mandatory requirement of a Swiss passport for leadership positions and shareholder control in Swiss banking. Remember, the bank’s demise was largely caused by Swiss citizens and foreign leadership was put in place by Swiss board members. Also remember, throughout the centuries the Swiss banking, pharma and luxury watch industries have mostly been founded by immigrants and refugees.

Banks’ Financial Ratios – a New Mantra

The extent to which bank leadership and policymakers alike conveniently rely on, hide behind or even believe in standard financial ratios, is puzzling if not shocking. Financial ratios clearly are necessary but certainly not sufficient as criteria to judge the viability and sustainability of banks’ businesses nor manage to restore any loss of trust by investors and clients.

Thus, when crisis hits policymakers get caught either sleeping at the steering wheel or looking in the rear view mirror, then have to re-act instead of acting, thus spreading fear of contagion across the financial sector and wider public including businesses and consumers.

Due to current regulation banks do their utmost to avoid putting real (cash) equity into their business and, on top their risk weight assets are self assessed.

Failed Communications – Whitewashing Reality

Trust is a necessary but not sufficient condition in banking. The communication content and style of bank leadership and policymakers in crisis has reached unprecedented levels of semantic creativity and absurdity.

Amateurism, incompetence, irresponsibility, greed and even lies get whitewashed and translated into unlucky, clumsy, careless or suboptimal communication.

It is too simple to put the blame for Credit Suisse’s demise on foreign nationals, immoral speculators, unfair competitors, rogue social media or various conspiracies.

Restoring much needed trust and addressing the structural deficiencies of banks’ business models can only be achieved by confronting reality, thoroughly analyze and implement fundamental reforms – minimize investment banking, increase hard capital requirements, align economic interests re compensation and reform the supervision and regulatory framework itself.

Financial Markets – Indispensable Leading Indicators

The macroeconomic backdrop remains complex and challenging. After the recent ECB and FED interest rate hikes the pressures on the weakest links in the financial sector will persist.

Key is clearly to monitor banks’ share prices, credit default swaps, valuations and credit rating. In the case of Credit Suisse these indicators clearly and timely illustrated the rapidly deteriorating sentiment, business and financial situation.

European Banks – Capital Markets will Test Banks’ Leadership and Policymakers

ECB President Christine Lagarde told EU leaders past week that the eurozone banking sector was resilient thanks to strong capital, liquidity positions and post 2008 reforms.

The reality, however, is quite different. Eurozone banks don’t always have viable business models nor sustainable profitability. Many never fundamentally restructured and responded to new technologies and changed consumer behavior too late.

Sadly, many remain national champions protected and misguided by their national policymakers. The banks ranked in the lowest quartile by equity performance, credit default swaps prices and price-to-book valuations remain most vulnerable to contagion emanating from the recent fallouts in the US and Switzerland.

Lagarde further told the 27 EU leaders: ‘we need to progress on completing the banking union; further work is also necessary to create a truly European capital markets.’

As a silver lining the next major bank casualty might propel the overdue pan European bank industry consolidation into motion and the finalization of the European banking and capital market union might take a leap forward and finally capitalize on the attractive scale of the EU and European market.

Expect global capital markets in the coming days and weeks to further test not only banks financial ratios but the quality of leadership, solidity of business models, and the resolve of policymakers.

Article by Beat Wittmann, Chief Investment Strategist at Key Family Partners SA