So what about European banks?
As the global panic subsides, patient investors may find opportunities.
The thing about bank runs is they tend to bring out the worst in markets, particularly when investor psyches are still fragile from a global financial crisis that occurred 15 years ago. So, when Silicon Valley Bank (SVB) spectacularly collapsed last month, roiling the banking industry the world over, the lens quickly turned to Europe’s problem child, Credit Suisse. Plagued by losses, the global banking giant’s shares got swept into a steep sell-off. When its largest stakeholder said it could not step in and buy more due to regulatory restrictions that kick in on stakes above 10%, the selling accelerated, prompting a forced marriage with fellow Swiss megabank UBS.
To be sure, all European bank stocks caught the selling wave, but only Credit Suisse crashed. The European banking sector is well-capitalized while liquidity remains adequate and funding/deposit structures stable largely due to a myriad of differences from certain U.S. banks. The SVB debacle exposed deficiencies linked to the bank’s idiosyncratic deposit base that featured an extremely high share of large, uninsured depositors. Sizeable holdings of longer-term Treasury securities whose values plunged on the most aggressive Fed hiking cycle in history didn’t help.
Europe is its own animal for the most part but the handling of Credit Suisse’s ultimate downfall certainly did not help. European banking officials were often late to get in front of issues and at times sowed uncertainty vs. attempting to alleviate the mounting fears. Credit Suisse’s new strategic plan revealed back in late October, alongside its large equity raise, was far too vague and complex. Swiss officials had been in denial before finally having to extend a $54 billion liquidity line to Credit Suisse, and then orchestrating an emergency takeover of the troubled bank by UBS, which was engineered behind closed doors within the span of a weekend. In doing so, the Swiss government effectively overrode the shareholders of UBS from having any say and circumvented the traditional hierarchy of seniority by wiping out the entire value of Credit Suisse’s additional tier 1 (AT1) bonds (worth $17 billion) at the expense of shareholder equity, threatening the viability of the $260 billion global AT1 market. Meanwhile, the ECB rang alarm bells, reportedly assessing whether any of its member banks maintained counterparty exposure to Credit Suisse—a situation that was of course exacerbated and sensationalized by the financial media—and telling finance ministers that some EU banks may be vulnerable to rising interest rates. Hardly the types of conversations investors want to hear amid a crisis of confidence.
As we stand today, the situation has stabilized, if only for the fact that the steady stream of negative headlines has eased for now. The analyst community has also helped in regards to its steady support of Deutsche Bank by citing a number of important distinctions between it and Credit Suisse. Investors certainly may want to retain some caution on European banks, considering how fast broad sentiment can quickly deteriorate. Ripples can last a long time and could strengthen again if there’s another “surprise.’’ That said, much of the weakness over the past month appears to have been an overreaction to contagion fears that were exacerbated by memories of the global financial crisis. Today, European banks overall appear broadly solid, with some names offering potential opportunities for long-term investors who are selective and get the timing right. Patience is required, however. They’re certain to be some bumps and bruises in the days and months ahead.