On March 19th, UBS announced it would buy the flagging global investment bank and European financials services firm, Credit Suisse. The “lifeline” $3.25 billion merger agreement ensures UBS as the surviving entity. The deal proposed significantly undercut Credit Suisse’s market value of $9.5 billion. The bank pushed back on the initial offer, claiming it would hurt shareholders. But UBS stuck to its bottom-line offer, with UBS Chairman Colm Kelleher calling it attractive for UBS shareholders, and an emergency rescue for Credit Suisse.
Much has been blamed on the recent default of Silicon Valley Bank and Signature in the U.S. – two crypto-heavy banks with little to no overlap with Credit Suisse. But the blame game began. “The latest developments that emanated from the banks in the U.S. hit us at the most unfavorable moment. One time, like last year, we were able to overcome the deep market uncertainty, but not this second time,” Credit Suisse Chairman Axel Lehmann told a press conference on March 19th. Swiss National Bank Chairman Thomas Jordan also lamented the “U.S. banking crisis” for accelerating a “loss of confidence in Switzerland” which had repercussions for Credit Suisse’s liquidity.
But the truth is that Credit Suisse faced headwinds long before the recent U.S. bank failures. At Polaris, we have been quite cautious on European financials for many years. Many still hold troubled assets from the Great Financial Crisis of 2008; capital ratios are not as robust as banks elsewhere in the world; capital requirements increased; and lackluster European macro-economics stilted lending growth.
We have also been quite negative on Credit Suisse for several years, as the institution suffered a long history of mismanagement and sharply declined since the 2021 blowup of Archegos Capital Management. Since that time, depositors, investors, and clients slowly pulled funds from the bank. Credit Suisse suffered a loss of about $8 billion in 2022, as its net revenues tanked by more than a third.
And the outflows continued, driving Credit Suisse to tap its “liquidity buffers” including central-bank reserves and high-quality government debt. One source they couldn’t tap was the Saudi National Bank (SNB), which said it would not provide any additional funding. The SNB was unwilling to reach a 10% ownership threshold that would be to subject to additional statutory and regulatory obligations. It was the final death knell for the long scandal-plagued institution.
But all was not lost at Credit Suisse. At Polaris, we have a lot of respect for many of the research personnel and their Holt Analysis system. We expect those components and professionals to carry on even in a merger with UBS. We await more deal details, as questions swirl about regulatory headwinds and anti-competition issues that inevitably crop up in a sizeable merger.
While European banks declined sharply due to the events in the U.S. and Europe, we think the fallout from Credit Suisse should not be that harmful to the global financial system in the longer term. However, the issues at Credit Suisse may limit the performance of the European financials sector in the near term due to restrictive central bank policy, higher inflation, higher interest rates, a difficult European competitive economic environment, and possible dislocations from such economic events.
In this context, Polaris only holds three banks in all of Europe, all of which are in Norway where the economy is perhaps the best in Europe. Other non-U.S. bank holdings include individual stocks in Thailand, Singapore, Korea, and Canada. We favor our current bank holdings due to their exposure to better economic conditions… while avoiding the likes of Credit Suisse.
This blog was penned by Bernard Horn Jr., President & Portfolio Manager, in April 2023. Mr. Horn founded Polaris in April 1995 to expand his existing client base dating to the early 1980s. Mr. Horn’s pure global value philosophy combines investment technology with traditional fundamental research. His 40+ year track record exceeds most current competitors in length and has produced admirable risk-adjusted returns since inception.
IMPORTANT INFORMATION: The views in this article were those of Bernard Horn as of the article’s publication date (April 06, 2023) and may be subject to change. Information, particularly facts and figures, are dated and in many cases outdated. Views and opinions of Bernard Horn expressed herein do not necessarily state or reflect those of Polaris Capital Management, and are not nor shall be used for advertising or product endorsement purposes.
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