- The Swiss government has arranged a corporate buy out of Credit Suisse, by their biggest rival UBS
- The sale price will be just $3.25 billion, despite Credit Suisse having a market cap of $8.6 billion in Friday
- It’s the latest in a string of banking failures and takeovers, following the closure of Silicon Valley Bank and Signature Bank
First it was Silicon Valley Bank, then Signature Bank and now Credit Suisse has ceased trading as well. The story with Credit Suisse is a little different, as it’s not been shut down by the regulator. Instead, it was bought out at a fire sale price by UBS, in a deal orchestrated by the Swiss National Bank.
This came off the back of a massive crash in the stock price, which saw it fall 67.78% over the last month.
If you think that all sounds a bit hush, hush secret handshake, that’s because in some ways it is. Credit Suisse problems have existed for a long time, and this deal means the widely lauded Swiss banking system can maintain its credibility in the global financial system.
Worried about all these banking failures and concerned about the wider economic environment? You’re not alone. Hedging strategies make more sense than ever right now, and at Q.ai we’ve designed a way to have AI proactively review the risks to your portfolio and hedge against them every week.
It’s called Portfolio Protection, and it’s available on all our Foundation Kits.
Silicon Valley and Signature Banks were both relative upstarts in the banking industry, tailored towards the volatile startup and crypto sectors. But Credit Suisse is the textbook definition of a premium Swiss bank.
They’ve been around for 166 years and cater to some of the wealthiest individuals and biggest companies in the world. So what went wrong, and does this mean that investors in other banks need to be worried?
Download Q.ai today for access to AI-powered investment strategies.
The Credit Suisse takeover
Credit Suisse has been no stranger to crisis. Really, they’ve been in the middle of it for the past three years at least, and investors have put up with terrible stock performance for far longer than that.
Since the market peak just prior to the 2008 global financial crisis, Credit Suisse stock lost 99.11% of its value. Other than a rally of around 6 months in 2009, that has been a consistent down trend over the past 15 years.
As part of their problems, they’ve received funding injections from their investors, the biggest of which was the Saudi National Bank. The current issues kicked off when SNB stated that they wouldn’t be providing any additional funding, with the Swiss National Bank then stepping in to provide an emergency loan of $54 billion.
For a bank the size of Credit Suisse this was only ever going to be a temporary measure, and it’s obvious that a deal has been in the works behind the scenes. Credit Suisse is one of just 30 global banks considered ‘systemically important,’ or in other words, ‘too big to fail.’
For the security of the global banking system and the reputation of Switzerland as a global banking center, the Swiss banking regulators decided that the best way forward was to amalgamate Credit Suisse with their biggest rival UBS.
To be clear, on the surface this buyout is a very bad deal for Credit Suisse shareholders.
It’s not quite at the level of the £1 that HSBC paid to purchase Silicon Valley Bank UK, but the purchase price of $3.25 billion on Sunday is a significant discount to the last trading market cap of $8.6 billion on Friday. That figure itself was down 86% from February 2021.
Not only that, but rushing the deal through means that the Swiss government will need to change the law to allow it to happen without a vote being put to shareholders.
As part of the deal, the Swiss National Bank will also be providing an additional $100 billion in liquidity available to UBS should they need to access it.
As you can see, this deal is highly unusual, but regulators believed that it was necessary to avoid the potential for another bank run, with the negative press for Credit Suisse specifically and the banking sector more broadly, causing large outflows of deposits every day.
Why has Credit Suisse stock performed so badly?
There’s been a long history of scandal and mismanagement within the Swiss banking giant. Back in 2014 Credit Suisse was fined $2.6 billion by the New York financial regulator and the US government, after it came to light that they had been assisting US clients in tax evasion.
Another $100m+ fine came from the Italian regulators in 2016 for the same thing, and a further $16.5 million from the U.S. the year after from failures in their anti-money laundering process.
Corruption charges were levied in 2018 by the US government in relation to ‘jobs for business’ arrangements with Chinese officials, resulting in a fine of $47 million.
They’ve also come under numerous counts of corporate espionage between 2016 and 2019, causing chief executive Tidjane Thiam to resign back in 2020.
Also in 2020, Swiss regulators opened a case against Credit Suisse, alleging that between 2004 and 2008 they had laundered up to $146 million for Bulgarian drug traffickers.
In 2021, Credit Suisse lost $5.5 billion on the collapsed Archegos hedge fund, a further $10 billion after the collapse of Greensill capital and was fined $427 million for their role in the “tuna bonds” scandal, pleading guilty to wire fraud.
Yeh, when you lay it out like that, it kind of makes sense why the stock hasn’t been performing too well.
Is the Credit Suisse failure linked to Silicon Valley Bank and Signature Bank?
Yes and no. From a fundamental standpoint, there’s no comparison between the two. As you can see banks on both sides of the Pacific have their fair share of problems, but Credit Suisse problems haven’t come directly as a result of the US banking failures.
With that said, banks all over the world are more sensitive to a bank run right now, as they’re all facing the same duration risk issues that SVB suffered from.
Really though, it’s not this that brought down Credit Suisse, but rather the nervousness over the banking sector in general. With confidence in banks at a low point, consumers were pulling money out of Credit Suisse at an alarming rate.
This potentially wouldn’t have been quite so dramatic, if global news hadn’t been dominated by bank failures for the week prior.
The outlook for the banking sector
We’re seeing consolidation going on, with a number of smaller banks now failing our receiving cut price buyout offers. While this might make investors and customers nervous, banks are significantly better capitalized than they were prior to 2008.
While there is never a guarantee that a financial crisis won’t happen, most analysts agree that the banking system is secure from a fundamental standpoint.
But that doesn’t mean it will always be like that. At some point in the future there will almost certainly be another financial crisis, which is why investors should ensure they always remain well diversified.
The bottom line
This diversification doesn’t just mean investing in a few different banks. We’ve seen how badly an investment can turn out for a specific company, but whole sectors can come under fire at times too.
2008 is a great example of how the entire financial sector underwent huge levels of volatility with major investors losses, and 2022 saw the same thing happen in tech.
To get proper diversification, investors need to spread their cash across different companies, different industries and even different countries.
Q.ai’s Global Trends Kit does this for you, and harnesses the to predict the performance of a wide range of securities every single week. It then automatically rebalances the portfolio in line with these projections, allowing you to take advantage of the latest trends and information, without having to lift a finger.
Download Q.ai today for access to AI-powered investment strategies.