Well-managed situation could lead to positive turnaround for Credit Suisse, says asset manager

Gulf News

Shares of Swiss investment bank Credit Suisse jumped as much as 40 per cent on Thursday after Switzerland’s central bank stepped in to support the lender, triggering a rally in bank stocks across Europe on easing investor concern that the firm’s troubles would trigger a global banking crisis.  A day earlier, the bank was staring into an abyss of uncertainty after its stock crashed 31 per cent just as wider markets were recovering from a battering triggered by the shuttering of California-based Silicon Valley Bank.  Read the full story here: https://gulfnews.com/business/banking/watch-why-swiss-banking-giant-credit-suisse-needed-a-54-billion-lifeline-1.94511110  See more videos at https://gulfnews.com/videos Read more Gulf News stories here: https://bit.ly/2HLJ2km  Subscribe to Gulf News on YouTube and watch more of our videos: https://www.youtube.com/user/GulfNewsTV  #UAEnews #siliconvalleybank #creditsuisse

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00:00Well, I think you mentioned a few words I want to pick up on. Before, you said idiosyncratic.

00:06I want to pick up on that. And then, of course, systemically important. I think those are

00:09two key issues here, because what we're really talking about is the fear that's been placed

00:14in the markets since Silicon Valley Bank. Like you were just saying before, you were

00:19here just a few weeks ago, a few months ago, talking about Credit Suisse and its tier one

00:24being above 14%. No one was worried about liquidity at that point. So what's changed

00:30since then? And really, nothing has changed except for Silicon Valley Bank has put us

00:34back in a frame of mind, where all of a sudden, we start thinking about how we didn't think

00:38that Washington Mutual Bank was anything more than idiosyncratic either. And it turned into

00:44a global financial crisis. So I think at this point, with rates having come up as steep

00:49and as fast as they have, we're all concerned that something in the system is going to break.

00:54And so we look at these vulnerable institutions, and we wonder, is this going to be it?

00:59Credit Suisse specifically, again, like you point out, tier one of over 14%,

01:03liquidity coverage ratio of close to 150. I mean, I don't think that's the issue.

01:10And this is very clearly not Silicon Valley Bank. We have a very wide depositor base. We

01:15don't have a problem with asset liability matching. We also don't have an issue with

01:20rates hedges. So we're talking about two completely different things. On the other hand,

01:25the Swiss National Bank couldn't afford to be sleepy watching that CDS blow out to thousands.

01:32They had to step in and calm down the markets a little bit. So it's interesting. Banks have

01:38been a dog, an underperformer in terms of an asset class for what, close to a decade.

01:43And just recently, people have started to get enthusiastic on the banking sector again,

01:48because of net interest margins. And wow, rates coming up, this is going to be great for

01:52profitability. But there are a few, like Credit Suisse, that still have some outflow problems

01:56and reputational issues to deal with. Yeah, I mean, to do the essay question,

02:01compare and contrast, 07-08 was very much about the quality of the book that the banks had and

02:09whether they were financially viable going forward. This, over the last few days, seems to

02:16be much more about business models and whether business models are viable going forward. And

02:22obviously, in the SVB case, the market decided that no, this bank no longer had a tenable

02:31business model with a positive price of capital. Now, we're talking about Credit Suisse. And as

02:37you point out, the SNB has effectively told depositors, you're going to be fine. We backstop

02:44this bank, no problem there. So the focus then is on the business model. Does this bank enjoy,

02:51perhaps, the opportunity to rebuild itself over the next 12 months? Or are we looking

02:57at a corporate event that sees part of the organization hived off to other buyers?

03:02Well, that's all speculation. And I'm sure that a banking analyst can go into much more detail.

03:07I think I would say that Credit Suisse specifically is still one of the world's

03:10largest asset managers. It has half a trillion in assets. And certainly,

03:15this could be a great turnaround story if the execution is good.

03:20You've got to have some fairly patient customers of Credit Suisse to watch this one through,

03:24though, given the outflow that we've seen from the organization.

03:27Absolutely. But I think, again, the stress that we're seeing at the moment

03:31really should have been predictable. Because when rates come up so fast,

03:35certain business models get challenged. And I don't think it's a wealth management

03:39business model that gets challenged. I think much more, and why we saw it at Silicon Valley Bank,

03:45is private markets are going to be challenged. Because if I have the same prospect of return

03:52on investment-grade credit, on cash, and on my implied equity yield, why would I take risk?

04:00I'm going to invest my money into money market funds or perhaps even into cash.

04:04And that's what we've seen happening by global allocators. And that then is a problem,

04:09because in private markets, they're calling capital. They can't necessarily bring their

04:13businesses to market. And they no longer have new investors. So all of a sudden,

04:19it causes some stress in the system. And business models that were built up on free capital

04:25no longer function. And so when you look at, for example, the spreads that you have on US

04:31high yields, 500 basis points they closed last night in a stressful market situation,

04:36that's still nothing. I think the market is still way too sanguine and way too easy about this idea

04:42of a soft landing, very short, very shallow recession. I think we're going to see some pain

04:48before we work way through this. And I think that a recession is unavoidable. There's no way

04:54that we can hike rates like this, have a tightening of financial conditions,

04:57a sucking of liquidity out the market without some casualties.

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