(report producer/analyst: China Post Securities Zhong Shuangying)
1 Credit Suisse:: Review Lehman Moment
Recently, foreign media reported that the century-old investment bank Credit Suisse is facing a bankruptcy crisis.
According to Bloomberg, as of 17:50 Beijing time on October 3, 2022, the price of Credit Suisse's 5-year credit default swap (i.e. investors purchase insurance for hedging defaults and other risks) was about 293 basis points, about 55 basis points higher than the price at the beginning of the year, and reached the highest level since the 2008 financial crisis.
swap , which is linked to Credit Suisse , shows that the probability of bond defaults in this Swiss bank is about 23%. Meanwhile, Credit Suisse shares have fallen from $14.90 in February 2021 to $3.92 on September 30, and PB fell to 0.197.
Last time CDS high appeared when Lehman Brothers went bankrupt.
On September 15, 2008, the fourth largest investment bank in the United States, with a history of 158 years, Lehman Brothers filed a bankruptcy application, triggering an unprecedented world financial crisis.
In 2007, Lehman (ranked 132nd in the Fortune 500) had a net profit of US$4.2 billion and a total assets of nearly US$700 billion. From September 9, 2008, Lehman's stock price plummeted 77% in one week, and the company's market value shrank sharply from US$11.2 billion to US$2.5 billion. Although Lehman took many self-rescue measures, he did not bring himself out of the predicament. Some companies with acquisition intentions also did not take action because the government refused to guarantee.
Lehman was unable to escape the fate of bankruptcy.
Recently, Credit Suisse executives reiterated its solid liquidity to major clients, counterparties and investors (Credits Chief Executive Officer Ulrich Körner said in a memorandum that the bank has nearly US$100 billion of capital buffer ) and capital position (it is expected that its common equity tier 1 capital ratio "CET1" will continue to remain at 13%-14% in the second half of 2022), but these have not comforted the market. Will Credit Suisse be the second Lehman Brothers?
Starting from 2021, Credit Suisse will reintegrate its previous sustainable development, research and investment solutions functions into its global business department, namely, Investment Solutions and Products (IS&P) into the wealth management department, and securities research into the investment banking department, eventually forming four major departments: Wealth Management, Investment Banking, Swiss Banking and Asset Management, and will disclose financial reports from the perspective of four major departments starting from Q1 2022.
Wealth Management Department Wealth Management Department integrates the ultra-high net worth and external asset management client departments of the former international wealth management department, the former Swiss Global Banking department, and the former Asia Pacific department's private banking business, providing comprehensive wealth management and investment solutions, tailor financing and investment solutions for clients, and providing consulting services for ultra-high net worth and high net worth individuals and external asset management company .
Swiss Bank Swiss Bank mainly provides comprehensive consulting and a wide range of financial solutions to private, corporate and institutional clients registered in the local market of Swiss . In addition, Credit Suisse provides consumer finance services through its subsidiary BANK-now and provides a leading credit card brand through investment in Swiss credit card AECS GmbH.
Asset Management Department
Asset Management Department mainly provides institutions and customers with strategies and comprehensive management of stocks, fixed income and multi-category asset products. In addition, there are a series of alternative investment products, including credit investment, hedge fund strategy, real estate and commodity , etc.
Investment Banking Department
Investment Banking Department integrates the consulting and capital markets business of the former Asia Pacific and Swiss Global Banking Department with the existing investment banking department to create a single global franchise business spanning all four regions.It mainly provides clients with a wide range of financial products and services, including global securities sales, trading and execution, financing and consulting services, pension funds and hedge funds, etc.
Since the US subprime mortgage class asset securitization products are one of the main investment targets in Europe, large European multinational banking groups have a high proportion of loans to US sub-investment-grade enterprises.
Therefore, Europe suffered huge losses in the 2008 international financial crisis. After the financial crisis, EU gradually established an existing financial regulatory framework. The existing financial regulatory framework will respond much smoother to systemic financial risks.
1. Integrated framework: three rounds and one minute.
The three bureaus include the European Banking Authority (EBA), the European Insurance and Occupational Annuity Authority (EIOPA) and the European Securities and Markets Authority (ES-MA); a joint cross-industry committee to analyze and monitor cross-industry financial risks and ensure consistency in regulation among industries, and to regulate financial holding groups.
2, mainly based on the Lam Falussy Frame Work, which was launched in 2000.
Monetary Integration (1999), the European Commission’s Action Plan for Financial Services and the establishment of the Lemfalusi framework has greatly promoted the process of EU regulatory integration.
In 2000, the EU issued about 15 measures on the coordination of regulatory oversight in banks, securities and insurance industries and mixed industries. In November 2003, the EU regulatory system was established in accordance with the framework of Lemfalusi.
Currently, the Swiss banking multi-level system consists of state banks, large banks, regional and savings banks, Laifuesen Bank (rural cooperatives), foreign banks, and private banks.
In 2021, the number of large banks (UBS, Credit Suisse, Riverson International Bank, and Zurich Bank) accounted for less than 2%, but the asset share accounted for about 44%.
Switzerland is one of the earliest countries in the world with the development of financial industry and has an important position in the history of World Bank . Banking is also one of the pillar industries in Switzerland.
Compared with the United States, Europe has not experienced large-scale financial innovation and the market is relatively fragmented. But among the world's famous investment banks, Barclays, Deutsche , UBS, and Credit Suisse all come from Europe.
As of 2022 Q2 Credit Suisse and Deutsche Bank (Deutsche Bank's share price is also close to halving) managed assets of about US$2300 billion, which is 3.82 times the assets held by Lehman Brothers when the crashed (about US$600 billion).
As the leading century-old investment bank, Credit Suisse is one of the benchmark banners for the global financial industry. Under the EU's integrated and globalized financial market, if Credit Suisse is truly the case with the foreign media, in the context of European industrial bankruptcy, it will lead the global economy into a dilemma?
2 Disassembly Credit Suisse: Banks and wealth management are good, investment banks are poor
After dismantling Credit Suisse's assets, income and profits, we found that the investment bank with the highest proportion of assets has dragged down significantly in the past two years; the profitability of asset management in the light asset business performed excellently; Swiss banks contributed the largest performance.
From the asset perspective, investment banks, Swiss banks, and wealth management assets are about 4:3:3, with investment banks accounting for the highest proportion. As of June 30, 2021, the proportion of investment banks, Swiss banks, wealth management and asset management was 42.93%, 29.11%, 27.45%, and 0.51%, which decreased in turn; as of June 30, 2022, the proportion of assets in various departments remained relatively unchanged, with Swiss banks rising to 32.28%, and investment banks falling to 37.20%, still at the highest proportion.
From the perspective of revenue, the revenue distribution of investment banking, wealth management, and Swiss banks is about 3:2:1, and the asset management revenue contributes less than 10%.
2021 H1, the proportion of income from investment banking, wealth management, Swiss banking and asset management was 45.47%, 31.74%, 16.31%, and 6.49%, respectively, which decreased in turn; in 2022H1, the proportion of income of each business was stable compared with 2021H1, the proportion of income from Swiss banking and asset management increased to 25.95% and 8.08%, respectively, and the proportion of income from wealth management and investment banking decreased to 29.36% and 36.62%, respectively.
From a profit perspective, there is great volatility.
2021 H1 Wealth Management contributed the most profits, 1748 million Swiss francs , Swiss banking and asset management profits contributed 857 and 251 million CHFs respectively, and investment banking profits were -2326 million CHFs.
2022 H1, Swiss Bank had the largest profit before tax, at 873 million Swiss francs; asset management fell to 83 million Swiss francs, a year-on-year -66.93%; wealth management profit turned from positive to negative, at -453 million Swiss francs; investment banks were still in a loss, at -992 million Swiss francs.
From the perspective of business model, Credit Suisse presents a revenue structure mainly based on intermediate income (processing fees), supplemented by investment income and interest income.
1) The interest income overall declined. interest income comes from bank deposit and loan business, investment bank margin financing and securities lending and repurchase agreement , and interest and dividend income of self-held investment products. This type of business has high requirements for asset and liability operations and is a heavy asset business. It accounted for 37.21% at its highest proportion in 2016, and then it showed a downward trend overall, reaching 25.50% in 2021.
2) The proportion of intermediate income remains stable. Intermediate income refers to handling fees and commissions, business undertaking and brokerage business from the investment banking department, investment management services from the asset management department, and portfolio management and consulting services from the wealth management department. This type of business has remained stable at 50%-60% share in the past six years.
3) The proportion of investment income has increased, but it has certain volatility. Since 2019, investment returns have increased significantly, but they are highly volatile.
Credit Suisse has been plagued with negative news in recent years, and its stock price has been falling since 2012.
What important things happened to Credit Suisse, a century-old investment bank? We sorted out the timeline:
2012, Credit Suisse was investigated for suspected manipulation of LIBOR;
2013, the US Department of Justice launched an MBS sales investigation against investment banks including Credit Suisse;
2014, Credit Suisse pleaded guilty for helping American customers evade taxes and paid a fine of about US$2.5 billion;
2015, Investment banks including Credit Suisse faced lawsuits for suspected competition in restricting interest rate swap markets;
2017, after the investigation by the Department of Justice, it paid a fine of US$5.3 billion for misselling securities supported by mortgage loans;
2020, a "spy gate" incident broke out in the internal struggle of Credit Suisse executives;
In 2021, Archegos, a fund under Bill Hwang, experienced a century-long explosion in its fund (Archegos has a net asset of approximately US$15 billion, and the leverage of is about 5-6 times, with a total investment scale of approximately US$80 billion;
heavy holdings include Viacom, Discovery, GSX, Tencent Music, Baidu , Wuxin Technology , etc., due to the continuous blows of China's rectification of extracurricular market, Chinese stocks delisting, and e-cigarette delisting, etc.), Credit Suisse lost approximately US$5.5 billion;
2021, supply chain finance company Greensill Capital Credit Suisse, which went bankrupt and provided financial support to it, lost US$3 billion;
In 2022, Credit Suisse had more than 18,000 accounts leaked, hiding more than 100 billion Swiss francs (approximately RMB 688.1 billion).
leaked accounts include Bulgarian drug smuggling gang leader Evelin Banev and several members. Immediately, Credit Suisse was prosecuted for suspected money laundering. Credit Suisse has also become the first large bank in Swiss history to be found guilty in a criminal case.
continues to show the "slow" and many loopholes in risk control management.
From the fourth quarter of 2021, Credit Suisse began to suffer continuous losses, and the successive impacts made Credit Suisse's stock price close to halfway.To get out of the situation, Credit Suisse is considering several relatively radical measures, including withdrawing from the U.S. market, firing more than 10% of its employees (45,000 employees worldwide), and restructuring its investment bank.
3 Risk interpretation: Internal and external difficulties, restructuring costs may be higher than returns
1. The global economy is under pressure, the UK pension insurance "exploded", and the housing market pressure is obvious
9 At the end of September, the British government announced a large-scale tax cut plan, the yield on the UK Treasury bonds rose sharply, and the British pension funds faced an unprecedented additional margin notice (related to the investment strategy of British pension funds LDI), and needed to sell a large amount of treasury bonds in exchange for cash, which in turn triggered an epic sell-off of British Treasury bonds.
Subsequently, the Bank of England announced that it would stop quantitative tightening plans, restart "unlimited" bond purchases, and stabilize the market. In terms of the housing market, unlike the United States, which dominates the loan interest rate with a 30-year fixed interest rate, 26% of the total outstanding mortgage loans in the UK is a floating interest rate, so mortgage loans in the UK are more vulnerable to the Bank of England benchmark interest rate .
As a benchmark for mortgage loans, the UK's 2-year overnight index swap rose to the high of the 2008 financial crisis, which was a huge impact on the UK's real estate market. Under the general environment of global economic pressure, the "explosion of stocks" of the UK pension insurance and the soaring pressure on the real estate market are just a microcosm of Europe's economic difficulties.
2. The operating environment of banks is deteriorating
In the past two weeks, the US dollar liquidity in the interbank lending market has been under pressure. The difference in Forward interest rate agreement FRA-OIS1 can be used to measure the liquidity of the US dollar. The larger the difference, the higher the financing cost and the tighter the liquidity of the US dollar.
FRA-OIS indicators have risen sharply in the past two weeks. For banks, on the cost side, the cost (or cost) of bank lending has risen sharply; on the income side, interest rates are rising, but economic growth is slowing down. This shows that the overall credit quality of banks is deteriorating.
Credit Suisse's investment bank is undergoing restructuring, with the purpose of achieving a more stable, capital-light and better investment banking business. However, these measures will take several years to fully implement, and a large amount of unquantified upfront costs can produce long-term positive results.
However, deterioration in macroeconomic and market conditions, recent ongoing losses, possible further losses in the coming quarters, as well as governance defects and turnover of senior management, may make the prospects of the ongoing restructuring work more complicated, and the expected benefits of strategic restructuring are questionable.
In addition, after the capital-intensive business deleverages and exits the bulk brokerage business, Credit Suisse may lose its market share and franchise strength.
Further review of the business portfolio may create new execution risks, and the results of the review will be announced in October, with the scope of review including securitization products, related financing businesses and possibly more businesses.
In 2022, Moody's, S&P and Fitch all downgraded Credit Suisse's ratings. The gap between Credit Suisse and other European counterparts in the "bbb+" SACP group (such as Barclays or Societe Generale ) will widen. At the same time, the gap between Credit Suisse and Bank of America is also widening, especially in terms of cost efficiency.
Standard believes that the setbacks encountered by Credit Suisse Group bring its rating closer to Deutsche Bank and United Credit Co., both of which have ratings of "bbb" SACP.
On the other hand, huge losses may delay technology investment in business transformation.
After losing CHF 1.6 billion in 2021, Credit Suisse lost CHF 1.9 billion in H1 in 2022.
The huge losses of investment banks are mainly caused by extraordinary valuation losses, reduced revenue exceeding expectations and rising costs, and there is no significant improvement in the short term. At the same time, the benefits of wealth management and asset management have also declined, partly due to the cyclical pressure on revenue and the lack of flexibility in the cost base. We expect large losses throughout 2022 and profitability will continue to be weak in 2023.
2. Cultivating a more risk-aware and prudent corporate culture has a long way to go
Credit Suisse has fully exposed its own lack of risk management in the negative events that have been plagued in recent years, and cultivating a prudent corporate culture has a long way to go.
However, the process is complicated by the massive change of the board of directors and executive leadership of Credit Suisse Group. Since the beginning of 2021, Credit Suisse Group has appointed new executives such as chairman and CEO, and many business and regional leaders have also been reappointed.
Credit Suisse needs to retain backbone staff and reduce turnover to maintain implementation of its long-term strategy. In addition, only under stable leadership can long and resource-consuming risk, compliance and cultural remediation work be given more time to fully implement and implement.
However, we should also see an optimistic side, that is, Credit Suisse has maintained a relatively stable capital structure. As of June 30, 2022, CET1 was 13.5%. According to S&P's forecast, the risk-adjusted capital (RAC) ratio will remain at 13%-14%. These provide a strong buffer for Credit Suisse, and its strong liquidity is also an important mitigation of uncertainty during the transition period.
Summary: 1) CDS was at the high level when Lehman Brothers went bankrupt, but Credit Suisse did not go bankrupt at that time. Credit Suisse CDS reached a 14-year high, and Credit Suisse-linked swaps show that it has a bond default within five years of about 23%, which is far from an unsettling level. But it simply and roughly reminds of the increase in risk.
2) The stock price continues to fall, and the signal of reversal is weak. The real terrible fundamental problem of Credit Suisse is at the operational level. The company needs outstanding strategic transformation to regain the trust of the market. Although the company's stable asset structure and sufficient liquidity leave room for the company's transformation, the benefits of restructuring and transformation are questionable, and the initial cost and time investment are huge.
3) If the worst happens, the impact of Credit Suisse will be much weaker than that of Lehman Brothers.
There are two reasons: ① Among the main businesses of Credit Suisse, commercial banking accounts for about 1/3. Compared with Lehman Brothers, almost all of them are investment banking business. Credit Suisse’s commercial banking business is protected by deposits, and its impact will be far weaker than Lehman Brothers; ② Lehman Brothers’ huge impact is closely related to its own and the market’s insufficient preparation for bankruptcy, but Credit Suisse’s asset structure and liquidity reserves a certain buffer, and the financial regulatory system’s bankruptcy handling of financial institutions will be more "smooth" after the financial crisis, and market volatility will be alleviated.
—————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————— If there is any infringement, please send a private message to delete it, thank you!
Selected report comes from [Fuanzhan Think Tank] or click: Yuanzhan Think Tank - a useful knowledge platform built for 300 million people | Report download | Strategy Report | Management Report | Industry Report | Selected Report | Paper Reference Materials | Yuanzhan Think Tank
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-