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Monday, March 20, 2023
Today’s newsletter is by Brian Sozzi, Leak Herald 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 [email protected].
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)
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