- All-Swiss deal saves bank from failing
- Equity investors put ahead of some bondholders
- Bank stocks sink on funding worries
Banking stocks across Europe fell again despite an emergency deal over the weekend to rescue ailing Swiss lender Credit Suisse (CSGN:SWX).
At 9.30am, the European banking index was down 5% with shares in German lender Deutsche Bank (DBK:ETR) down 8%, Commerzbank (CBK:ETR) down 6%, French bank Societe Generale (GLE:FPA) down 7% and Europe’s biggest bank HSBC (HSBA) down 4% after a 6% fall in its Hong Kong-listed shares.
WHY ARE INVESTORS STILL WORRIED?
The deal to save Credit Suisse, which instead of being nationalised has been bought by rival UBS (UBSG:SWX) for SFr 3 billion or SFr 0.70 per share, should in theory put a ‘floor’ under European banking stocks.
However, as part of the deal, the Swiss banking regulator took the unprecedented decision to write down the bank’s SFr 16 billion ($17 billion) of Additional Tier One or AT1 bonds - which are the riskiest part of the fixed-income structure - to zero, while ‘saving’ existing shareholders.
Therefore, although Credit Suisse shares are down another 60% today, equity investors have still been able to salvage something while holders of the AT1 bonds have been wiped out.
‘AT1 bonds were introduced in Europe after the global financial crisis to serve as shock absorbers when banks start to fail’, explains Charles-Henry Monchau, chief investment officer at Syz Bank.
‘They are designed to impose permanent losses on bondholders or be converted into equity if a bank’s capital ratios fall below a level, effectively propping up its balance sheet and allowing it to stay in business.’
According to the Swiss bail-in regime, AT1 debt normally ranks above equity in the event of bankruptcy, so the decision to write it down to zero - while it follows the letter of the law - is ‘an arresting development’ says Monchau.
With Credit Suisse accounting for 13% of all AT1 dollar bonds issued, the fact investors have been wiped out has created a great deal of negative sentiment in the market for bank credit and high-yield bonds in general.
COULD THERE BE MORE BANK FAILURES?
The fact that Credit Suisse - which by most standards was considered ‘too big to fail’ - has had to be rescued obviously raises concerns that other banks could follow.
The Swiss firm had admitted seeing outflows of client funds as far back as December, and it will no doubt have seen a lot more outflows this month, while there are bound to be questions over the quality of its assets.
As part of the takeover, the Swiss central bank is offering SFr 100 billion of liquidity assistance to UBS and the government is granting a SFr 9 billion guarantee for potential losses from assets it is taking on.
Meanwhile, in the US, regulators have apparently been unsuccessful in finding a buyer for the failed Silicon Valley Bank (SIVB:NASDAQ) and are reported to be looking to break it up and sell off its loan book.
While more US regional banks may struggle, it seems very unlikely we are about to experience a re-run of the 2008 global financial crisis given the lessons learned at the time by central bankers and regulators.
