Please see below, Brooks Macdonald’s ‘Weekly Market Commentary’ which provides a brief overview of the key market events for the past week. Received yesterday afternoon – 20/03/2023
US regional bank concerns move to Europe as Credit Suisse is bought by UBS
The banking sector issues started with Silicon Valley Bank (SVB), moved into the US regional banks but finally became a far wide issue of banking confidence when Credit Suisse’s creditworthiness was called into question last week. Over the course of the weekend UBS and Credit Suisse have agreed a deal which seals the fate of one of the best-known European banks.
The takeover of Credit Suisse bypasses a shareholder vote and sees ‘CoCos’ written down to zero
On Sunday it was announced that UBS would buy Credit Suisse for $3.3bn, a significant discount to where the shares were trading on Friday. The merger is being pushed through without shareholder approval which sets a precedent that systematically important banks can be sold or merged with minority shareholders unable to push back. In practical terms this was designed to avoid a high-profile deal being thrashed out, then voted on, all in the eye of financial markets that are skittish after the events of the last week. The other feature of the deal is that owners of ‘contingent convertible bonds’ (CoCos), a debt security designed to convert to equity during a crisis, will be written down to zero. While Credit Suisse is clearly under major pressure, its actual solvency ratios have been robust, this will undoubtedly raise strong objections from owners of the CoCo securities which have had a worse outcome than equity holders despite appearing to be more senior in the bank’s capital structure.
This week the Federal Reserve needs to weigh up the size of its next interest rate hike amidst the banking volatility
There will be much debate in the coming weeks about what the correct yield is for CoCo bonds going forwards. In the post financial crisis world, they have become an important part of bank regulation which sees a pool of debt capital designed to take losses during a major banking event (rather than just equity holders taking the pain then the government stepping in). The fair price for such securities going forwards will be questioned given the Credit Suisse precedent. Investors will be looking to the ECB and Federal Reserve for confirmation of whether this precedent will only apply to Swiss banks or the wider sector. A consortium of central banks (including the Federal Reserve, Bank of England and European Central Bank) has announced that they will increase the liquidity that they provide to the financial system to help provide a backstop during the current volatility. Later this week attention will turn to the latest Federal Reserve meeting where markets expect only around a 70% chance of a 25bp interest rate hike given the current banking turmoil.
At a macroeconomic level the Credit Suisse/UBS merger reduces market risk and is likely to put a line under the near-term risks of Credit Suisse’s creditworthiness given it comes alongside a large amount of liquidity support from the Swiss National Bank. Credit Suisse has been an outlier amongst European banks for some time, with elevated yields, questions over its management and involvement in several high profile issues (including Archegos and Wirecard). The reduction in the risk of Credit Suisse contagion is good news for financial markets today, however the implications of the rapid deal which has run roughshod over market laws and conventions will have more impact on how banks fund themselves going forwards.
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Alex Kitteringham
21st March 2023