Credit Suisse’s market situation worries both its employees and investors. The collapse of the Swiss bank’s share price in recent months and its credit default swap spreads raise concerns about a Lehman Brothers scenario. If the Credit Suisse situation remains an isolated case, it is not without mentioning the risks that face the entire financial sector.
With stock prices starting a bearish phase (the “bear market”) and recession no longer a taboo word, markets are entering a new cycle. In this regard, a report by the European Union Banking Authority, the European Banking Authority (EBA), noted on 6 October that “bank share prices have underperformed the general stock price index since the beginning of the Russian war against Ukraine “. In fact, while the pan-European Stoxx Europe 600 Banks sector index peaked at 166 on February 10, it was only 120.3 on October 6, down 27.53%.
If I’m worried about a recession (…), then I’m worried about the volatility of bank dividends and any capital requirements that may be imposed on them. Preferring a defensive stance, I tend to keep only those that are well capitalized.
The disappointing performance of bank stocks on the equity markets also pushes asset managers to reduce the exposure of their portfolios to banks. Caroline Randall, Capital Group’s equity portfolio manager and member of its management committee, told Paperjam she was “less interested in banks now.” And she adds: “If I’m worried about a recession (…), then I’m worried about the volatility of bank dividends and any capital requirements that may be imposed on them. Preferring a defensive stance, I tend to keep only those that are well capitalized.
Credit spreads and interest rate shocks
And in general, according to the EBA, it is negative trends in financial capital markets that have a particular impact on bank financing. European banks have sufficient liquidity, but financing conditions are deteriorating. “Primary wholesale financing markets are still characterized by frequent periods of limited activity due to growing macroeconomic uncertainty,” said the European banking supervisor. This is without taking into account the fact that recent policy rate hikes by central banks are likely to increase credit institutions’ borrowing costs.
On the credit risk front, the EBA does not detect any significant signs of deterioration, but announces “bleak prospects”. European banks, for example, have declared € 322 billion in loans and advances to companies in the energy sector. In this regard, the Financial Sector Supervisory Commission (CSSF) stated on 22 August that the Luxembourg banking sector is no exception to the risks of credit spreads and interest rate hikes, but remains more protected thanks to its diversification.
Increase in risk premiums
Among the key indicators, the CET1 (Common Equity Tier 1) ratio remains in the required average of 15%. This is the share of capital held in the form of shares by a bank to cope with financial difficulties. However, the EBA regrets that “several institutions report a CET1 ratio of more than 300 basis points below the EU average”. These banks therefore remain more vulnerable to the current crisis. Since the cause is also the consequence, banks that will have to refinance part of their liquidity reserves will therefore face a decline in investor demand and an increase in risk premia.
Luxembourg banking institutions have a CET1 ratio above 21%, much higher than the average of 15% for the entire sector on a European scale. They should therefore be able to show greater resilience in case of difficulty.
Some banks are more competitive than others, some have more diversified lines of business than others, some will be more exposed than others to some central bank actions and interest rates. Some are more global, others are national.
With bank financing conditions increasingly difficult, should we expect a catastrophic scenario? According to Julie Dickson, Capital Group’s director of equity and multi-asset investments, the answer is rather relative: “Some banks are more competitive than others, some have more diversified business sectors than others, some will be more exposed than others to some of the actions of central banks and interest rates. Some are more global, others are national. ”But overall, banks are now in a better position than the 2007-08 financial crisis, he notes, thanks in particular to new regulations on reserve requirements, lending practices and transparency.