A Suisse twist

Citi, 5am GMT:

We see very limited read-across from the failure of Silicon Valley Bank to European Banks, which have less deposit concentration, are still seeing healthy deposit flows, operate with large liquidity portfolios and remain well capitalized.

Citi, 12:40pm GMT:

In a jittery market, following the failure of Silicon Valley Bank in US, Credit Suisse shares have sold off by >20% today.

OK, we’re being mean, things are moving quickly. Stepping back, Citi put out an interesting a timely note this morning, which the Paradeplatz 8 gang (or, perhaps, their tepid Saudi backers) went and ruined.

Here’s Citi’s Andrew Coombs et al. then:

For the European banks, we see less risk of deposit flight and believe they have more liquid balance sheets. We also see less risk to capital in the event balance sheet positions in negative carry have to be crystallized…

The deposit-gathering model of SVB appears to be unique, with a focus on commercial clients, concentrated in early-stage technology and life science/health care companies. Furthermore >90% of balances were over the $250k FDIC insurance limit. In Europe there is no listed bank with such a deposit concentration and we are still seeing system-wide deposit inflows vs outflows in the US, although deposit growth is beginning to slow, especially among commercial clients…

European banks operate with high liquidity coverage ratios (LCRs), at 163% in aggregate, whereas in the US only the largest banks have to manage to an LCR regime (SVB was deemed too small).

By the LCR measure, SEB, BNP Paribas and HSBC were the worst, although we can’t help but notice a certain Swiss investment bank seeing a chunky year-over-year slide (at a conference yesterday, CS chief executive Ulrich Koerner said its average LCR has since risen to 150 per cent, from 144 per cent here):

Of course, no broad assessment of Europe’s banks would be complete without a nod to CS’s idiosyncrasies, including a 40 per cent plunge in consumer deposits a the end of last year:

Banks that have seen the largest qoq deposit contraction in 4Q22 include Credit Suisse (well documented on private banking outflows), SEB (led lower by withdrawals by financial institutions which typically review their cash position at the end of the year), SHB (outflows of corporate deposits, primarily in capital markets), ABN (corporate centre contraction on seasonality and corporate deposit contraction in part due to USD FX movements), plus DNB, Barclays and Natwest (all on FX movements and a contraction in corporate deposits).

Fast forward a few hours, and with investors dumping CS shares, a reassessment was needed. Citi say the comments by the chair of Saudi National Bank explaining why it can’t pump more lucre into CS “appears insufficient to explain the magnitude of the market move”.

So what happens next?

The sword of Damocles here, Citi reckons, is naturally gonna be how customers and credit agencies respond:

Credit Suisse’s CDS is trading at elevated levels. This itself has little immediate consequence for the bank, but any knock-on impact to sentiment risks potentially impacting on customer deposit behaviour and/or on the pricing demanded by the market for any new term issuance. If collateral posting is contractually linked to a trigger, then it is typically to external credit ratings (CS notes in the annual report that a simultaneous one, two or three-notch downgrade by all three major rating agencies in the Bank’s long-term debt ratings would result in additional collateral requirements or assumed termination payments under certain derivative instruments of SFr0.6bn, SFr0.8bn and SFr0.9bn respectively).