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Monday, March 20, 2023
Today's newsletter is by Brian Sozzi, Yahoo Finance's executive editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Have tips on SVB, First Republic, Credit Suisse, UBS or other banks? Send confidentially to brian.sozzi@yahoofinance.com.
Welcome to your first (or second) banking crisis.
Ailing 167-year old Credit Suisse will now see itself into a forced marriage with stronger rival UBS, following a weekend of behind the scenes drama between each bank's executives and the Swiss authorities.
A former high-ranking UBS exec familiar with the current talks tells me Credit Suisse's troubled investment bank could be hived off into a zombie bank ran down over time by Swiss regulators.
The deal may help calm the broader financial system, but could unsettle UBS shareholders.
"You go from having the best run Swiss bank in UBS with a clear strategy, to owning the worst," the source added.
UBS CEO Ralph Hamers didn't return my request for a chat on this one over the weekend. When reached by email, a handler for Credit Suisse chairman Axel Lehmann chimed in and told me Lehmann had no time. Schade.
Wild turn of events here though, which will fundamentally once again alter the landscape of Wall Street and further concentrate the power into the hands of a few high-profile players.
"The Goliaths will keep winning," veteran top bank analyst Mike Mayo told me, an investment thesis he has been championing for a while where the likes of Bank of America, JP Morgan, Goldman Sachs, Citigroup and Morgan Stanley continue to get stronger amid the struggles of others on the Street.
Meanwhile, Berkshire Hathaway's Warren Buffett has resurfaced — this time reportedly in chats on the banking crisis with senior officials in the Biden administration. The Oracle of Omaha is a top investor in Bank of America, Bank of NY Mellon, and Citigroup, so it's no small surprise he is gathering all the information he could from inside the Beltway.
Also keep in mind the billionaire loaned $5 billion to Goldman Sachs at the height of the last financial crisis and saved Solomon Brothers in the early '90s after a bond trading scandal.
Buffett could be poised to strike once more with a lucrative offer of some kind for a struggling bank, which could go a long way in stabilizing markets.
These are just some of the sights and sounds of this rolling crisis with more inevitably on the way.
In the process of all this high drama, I see two questions emerging for investors.
First, do you use this opportunity to add risk to your portfolio as it's clear regulators (and billionaires such as Buffett) will not let the financial system go up in smoke — similar to what they did in 2008/2009?
On this point, I think Goldman strategist Peter Oppenheimer gives a succinct answer on how to think through this:
"Even if markets rebound from current levels in the short term, high uncertainty and lowered confidence levels are likely to mean an ongoing ‘Fat & Flat’ market given that valuations do not look particularly attractive. In this regard, we see two potential problems. The first is that the U.S. equity market, long a significant out-performer, remains expensive relative to history and relative to real rates. Despite cheaper valuations outside of the U.S. – a key factor in recent outperformance – other markets are unlikely to de-couple in any U.S.-led correction. Even on longer-term comparisons, which can be a useful barometer at points such as this, the U.S. equity market continues to look stretched, after years of low rates and strong technology sector returns."
The other question is what is the play on bank stocks? Is this a golden opportunity to buy big names like Bank of America and JP Morgan as they are seeing an influx of deposits (as sources have told me), in effect strengthening their footholds longer term?
Maybe, opines JP Morgan analyst Vivek Juneja:
"We expect large bank stocks to remain choppy near term but for medium term holders the sector looks attractive due to cheaper valuation and stable/growing deposits, albeit with some uncertainty surrounding potential regulatory fallout. Large bank stocks are down 5-25% since March 8 when Silicon Valley Bank’s issues unfolded – money centers are trading at 7.7x 2024 consensus EPS on average, well below 10.3x long-term average and regionals at 6.6x versus 11.4x long-term average."
Happy Trading! (hopefully)
Economy
No notable data set for release.
Earnings
Foot Locker (FL), Pinduoduo (PDD)
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Related Quotes
The Bank of England and Brussels have turned on Swiss officials for wiping out Credit Suisse debt investors in an emergency rescue deal, amid fears the move could spread fear throughout the banking sector.
Credit Suisse said 16 billion Swiss francs ($17.24 billion) of its Additional Tier 1 debt will be written down to zero on the orders of the Swiss regulator as part of its rescue merger with UBS, angering bondholders on Sunday. FINMA, the Swiss regulator, said the decision would bolster the bank's capital. The move reflects authorities' desire to see private investors share the pain from Credit Suisse's troubles.
Wall Street largely sees positive signs while digesting the historic deal.
Switzerland awoke to a new era on Monday after UBS swept up Credit Suisse in a government-brokered rescue that dented the country's long-held pride in its banking expertise. A bank employee association said it was deeply shocked by the potential consequences from the deal to save the 167-year-old Credit Suisse after customer and market confidence in the lender evaporated. In a package orchestrated by Swiss regulators on Sunday, UBS will pay 3 billion Swiss francs ($3.23 billion) for Credit Suisse and assume up to $5.4 billion in losses.
Swiss bank UBS agreed to buy Credit Suisse Sunday in a government-backed deal; First Republic downgraded, plans stock sale.
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The crisis rolls right along, explains this strategist.
The tech trade comes back.
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Shares of First Republic fall sharply after the regional bank’s credit rating was cut again by S&P Global, while Credit Suisse tumbles after UBS agrees to buy its Swiss rival for more than $3 billion.
The chairman of Saudi National Bank, Ammar Al Khudiary, went on Bloomberg TV on Wednesday and was asked if it would increase its stake. “The answer is absolutely not, for many reasons outside the simplest reason, which is regulatory and statutory,” he said.
“We’ve watched the bank lurch from scandal to scandal for so long that it’s hard to recall all of them at this point.”
The talks are part of an urgent effort engineered by Swiss and global authorities to restore trust in the banking system.
U.S. banks should boost liquidity, tighten lending standards and boost balance sheet defenses after bank closures heightened concerns about systemic risks, Morgan Stanley analysts said on Monday. "Expect management teams will open up the defense playbook," said a Morgan Stanley report led by Betsy Graseck. The bank said the sector is already in "systemic risk territory," as the U.S. Treasury, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) jointly invoked the systemic risk exception last week.
Some U.S. regional banks' efforts to raise capital and allay fears about their health are running up against concerns from potential buyers and investors about looming losses in their assets, five sources with knowledge of the discussions said. First Republic Bank and PacWest Bancorp are among the banks that have been speaking to peers and investment firms about potential deals in the wake of U.S. regulators taking over Silicon Valley Bank and Signature Bank this month amid a flight of depositors, sources have said. First Republic's shares have fallen 80% since March 8, when the crisis started, while PacWest shares are down 65%.
The write-off of Credit Suisse's AT1 bonds shows how the usual rules can be thrown out the window in a crisis.
Major indexes traded higher as central banks sought to pre-empt an international dash for cash. First Republic Bank’s stock slid.
The “Shazam!” sequel fell short of its modest expectations ($35 million) as well as the first film in the series ($53.5 million in April 2019), and earned a place on the very low end of modern DC comics movie launches, between “Birds of Prey” ($33 million in February 2020) and “The Suicide Squad” ($26.2 million in August 2021), both of which were R-rated. Critics, many of whom found the first film charming, were largely underwhelmed by this outing.
Hedge-fund manager Leon Cooperman said the current financial crisis isn't much of surprise. He divulged some sectors and one stock that he's buying now.