By Frédérique Carrier, Head of Investment Strategy for RBC Wealth Management in the British Isles
Still reeling from the SVB collapse, European banks on the STOXX Europe 600 lost 11% of their value during the week.
Switzerland’s second-largest lender, Credit Suisse (CS), revealed that its auditor had identified “material weaknesses” in its financial controls, and that the outflows which had besieged it had not reversed. Its share price tumbled as much as 30% after its main shareholder, the Saudi National Commercial Bank, ruled out a capital injection.
Credit Suisse is deeply integrated into the global financial system. We think it remains too big to fail, even though the value of the bank’s assets has fallen by half since the financial crisis of 2008. Switzerland’s central bank stepped in with a CHF50 billion (US$54 billion) loan facility to shore up the bank’s liquidity, and offered to buy back senior debt of up to CHF3 billion. This clear statement of support restored investor confidence, and banking sector share prices stabilized after the announcement. Whether depositors are sufficiently reassured to stem outflows over the next few days is a key question, in our view.
Within the European banking sector, Credit Suisse stands out due to its recent controversies and complicated restructurings. We would point out that European banks are generally well capitalized and better regulated than they were in 2008. Investor concerns are primarily focused on liquidity, i.e., whether banks have enough cash to meet demands from customers and counterparties. At this time, there is no evidence that borrowers are struggling to repay their loans, which would indicate that banks’ solvency is at risk, as it was in 2008.
While markets are relieved that the Swiss central bank stepped in, sentiment is bound to remain very fragile, particularly as investors will likely worry about the eventual economic impact of aggressive monetary policy tightening by the European Central Bank (ECB).
Despite the markets’ turmoil, the ECB opted for a well-telegraphed 50 basis point increase in interest rates to fight the region’s stubborn inflation. Its statement suggested targeted liquidity would be available should banking sector volatility persist.
Market expectations for peak interest rates in Europe have fallen markedly since the SVB failure, and now anticipate rates topping out at 3.2% by October, down from close to 4%.