On a banking crisis (UPDATED)
DOES NOT CONSTITUTE INVESTMENT ADVICE, INCLUDING, BUT NOT LIMITED TO, INDIVIDUAL INVESTMENT ADVICE
Further to the recent fallout of the Silicon Valley Bank, we are deeply concerned with the state of the banking system in general.
Speaking more concretely, we see some disturbing signs in supervising role of some of the regulators, even with ones with a reputation of professionalism and integrity. Let’s take a look at the latest news just for one day.
Latest report of NYT indicates the SVB was using “bad models” and regulators knew about it for one year.
Latest news about UBS allegedly offering 1 billion USD for Credit Suisse which at the Friday’s closing cost around 9,5 billion USD clearly shows the potential existence of mismanagement practises even in the biggest group and probably lack of attachment to the overseeing the banks.
We don’t know the outcome of the situation for the sector and global economy. Turmoils are unpredictable and sometimes unavoidable. What we know for sure, it is a simple math and an intrinsic conflict of interests in almost any bank or fund.
Simple math. If someone acquires money overnight (or close to it) at the rate of 0-1% and lends for 3-4% pa in a project destined to be over 1 year, then it looks like a great business only if the overnight rate is intact or decreases. Once the rate goes up to 3+% territory, it is nearly impossible to keep this project in a non-red state. It doesn’t mean that the bank will run out of money, but the capital should be burned.
Intrinsic conflict of interests. The problem with the industry is that when a person lends money to the bank (buys shares of the fund) the money should work. “Work” means “to be invested”. Investors and unit holders usually do not like funds and banks which have big portion of uninvested cash. Bankers have to lend money further and managers of the funds have to invest. If the banker invests into bad project, then it will be general risk and they won’t be fired because the risk is general, it is for everyone. If the banker waits too long for the rate increase or for the good project to come, then they will be fired (“Why we should keep the person who does nothing?”, would have said the management).
In usual environment simple math multiplied by conflict of interests results in positive growth rate of the economy (we have to deduct fraud and failures but it is everything included). In light of the recent rates increase marathon, it doesn’t seem to be the case. European Central Bank which was trying to fight the inflation raised the rate from -0,5% to 3,0% in less than a year (they made 0,0% on 27 July 2022 and currently the rate is 3,0%). For the sake of clarity, the financial system in Europe dealt with zero and negative rate from 11 July 2012 to 27 July 2022, more than 10 years! Almost half of the generation bankers in Europe started their day with one task: “I have free money again today, how to earn at least something?”.
We hope that the regulators in both USA and in Europe will revaluate current situation and make the miracle happen.
In the meanwhile we continue to stay away out of shares and bonds of the banks. [Indeed why invest in a minority share of the bank at valuation 9,5B if the next day the bank might be sold at valuation 1B 3B?] We continue to view EUR (as an investable currency compared to USD) prospectives in a very dark tones.
UPDATE (Mar 19, 2023; 20:21). SNB announced the providing of up to 100B CHF to both UBS and CS. UBS informed the public of a takeover of CS for an all-share deal worth approximately 3B CHF and scheduled the urgent call at 22:00 of Sunday, Mar 19, 2023. Since there were no money involved the situation looks much grimmer that it was expected.
UPDATE (Mar 19, 2023; 22:51). Interestingly, that the management of UBS on the conference call informed the public about 8B CHF cost reduction due to synergies (hopefully). Also, according to them, FINMA (the regulator) decided to write off almost 16B of quasi-equity (“CHF 15.8bn of Credit Suisse AT1 instruments written-off by FINMA“). In addition to that, the government supported the deal in potential operational loss – in addition to 100B CHF liquidity support – “CHF 9bn protection from the Swiss authorities in case of losses extending beyond the first CHF 5b which would be borne by UBS“. The total badwill will be around 56B CHF – “CHF ~ 56bn full badwill recognition (including equity from AT1 write-down) to count towards CET1 capital to cover both purchase accounting marks, restructuring costs and acceleration of non-core assets run-down“. In total, all (it is pure emotional interpretation of the call) looks like UBS was keen to buy CS, but didn’t have detailed information about the main competitor. The new UBS would become #3 asset manager in Europe (from #5) and #11 globally (from #19) with approximately $5TRN of invested assets – this data is from the presentation of UBS.
