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A turbulent weekend has just come to an end in the banking sector: on Sunday, the large Swiss bank UBS agreed to take over its troubled competitor Credit Suisse for USD 3.25bn.
In the run-up to these events, we had reported on the liquidity support for Credit Suisse in our blog:
This takeover price translates into a fraction of the closing price of Credit Suisse on Friday. Credit Suisse shareholders will have to accept significant losses. According to the Financial Times, UBS will pay approximately CHF 0.76 per share in own (UBS) shares. Previously, the Credit Suisse board of directors had rejected an offer of CHF 0.25. The price the banks settled on still falls significantly short of the closing price of CHF 1.86 on Friday (17 March 2023). In addition, the Swiss National Bank will place liquidity assistance to the tune of USD 100bn at Credit Suisse’s disposal.
Swiss National Bank as driving force
Media reports suggest that the two parties had been in negotiations since Wednesday. When an SNB credit line of CHF 50bn was not enough to stop Credit Suisse’s share price from falling and to prevent customers from continuing to withdraw their money, the central bank stepped in to “force” a merger.
The merger was supposed to help close the Credit Suisse case. However, the consequences for the global economy will be felt because of the recent turmoil in the US and European financial systems. Until a fortnight ago, central bank rate hikes in the US and Europe seemed to have little impact on the economy. The European and US economies had performed better than expected in previous quarters. The recession expected by many had failed to materialise. This changed with the insolvency of Silicon Valley Bank (SVB), which was doomed by the withdrawal of deposits and losses on credit-safe bonds.
For more information, please visit Silicon Valley Bank – Impact on the Stock Markets
Erste Asset Management: slower growth
We believe that these events will be slowing down economic growth, primarily through two channels:
- The cost of capital has increased for banks in recent weeks, but this increase been passed on to the customers. Higher credit costs have a dampening effect on growth.
- This is happening in a scenario where banks have already tightened their lending standards in recent months. In other words, taking out a loan has become more difficult/expensive.
Effects on the interest rate markets
The interest rate markets have started to price in a weaker economic development – a fact that manifests itself in the expected key-lending rates, which have fallen in the past two weeks. While the market is still pricing in interest rate hikes in March and May, market participants expect significant rate cuts subsequently (see chart).
Changes in the US Fed funds rate priced in
Source: Bloomberg
Note: Past performance is not a reliable indicator of future performance.
Central banks in Europe and the US have recently seen lower economic growth as acceptable collateral damage in the effort to bring down inflation. Or in other words: the central banks want lower economic growth. Given this environment, the events surrounding SVB and Credit Suisse may also come with a positive aspect. After all, for the equity market in general it would probably be better if growth were to slow down in the wake of the recent bank turmoil than if the US Federal Reserve had (had) to raise interest rates to over 6%. In both cases, economic growth would slow down, but at least in the first scenario, the discount rate applied to earnings would not be as high. This means that some of the effect that yield rises had on equity markets would be reversed.
Lower risk in the Erste AM mixed funds
From our perspective, the risk of recession has increased. Therefore, Erste Asset Management has reduced the risk profile in the mixed funds. This cautious strategy was implemented by reducing equities. The freed-up funds have been reallocated into near-money market investments and European government bonds.
No AT1 bonds in mutual funds (direct investments) managed by Erste AM
Please note: AT1 bonds (Additional Tier 1 bonds) of Credit Suisse are not included in any of the mutual funds managed by Erste Asset Management. AT1 bonds were introduced after the global financial crisis in 2008 to serve as a buffer when banks were in danger of failing. They are considered equivalent to equity and are intended to provide an additional buffer so that banks can survive times of crisis.
For a glossary of technical terms, please visit this link: Fund Glossary | Erste Asset Management
Legal note:
Prognoses are no reliable indicator for future performance.