Troubled Credit Suisse has got a buyer. UBS, a bigger rival, is acquiring the swiss bank for nearly $3.25 billion — a deal brokered by the Swiss regulators in a bid to minimise turmoil in the global banking system. Analysts noted that small regional banks were not large systemic threats but Credit Suisse was, as it does account for a significant share of lending in the US. The fresh development is seen easing investor concerns a bit, but eyes would mainly be on the US Federal Reserve’s commentary on March 22, the day of its money policy outcome.
The fears of financial contagion rising from the banking crisis in the US and Europe appear to be largely contained by the quick response of the governments and central banks, said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
The Swiss government exercised its emergency powers to facilitate a swift consummation of this merger without the necessity of shareholder approval, UBS said in a presentation, adding that it expects closing of the deal in Q2 2023, subject to expedited regulatory approval.
In the presentation, UBS said the deal will add scale to its leading Global Wealth and Asset Management franchise with $5 trillion invested assets. It said the financial terms were attractive, including downside protections and very significant liquidity support provided by the Swiss National Bank.
Learnings from 2008 crisis
Vijayakumar said the big learning from the global financial crisis of 2008 was that failure of large financial institutions will lead to systemic issues, leading to financial contagion and ultimately to recession.
“Learning from this crisis, this time there has been a concerted global action – the latest being the buyout of Credit Suisse by UBS – to contain the crisis. The volatility index in the US at around 25 doesn’t indicate any panic like in 2008. However, investors may remain cautious and wait for stability. The boost to India’s macros arising from reduction in trade deficit and big decline in Brent crude to $73 are positives from the market perspective,” Vijayakumar said.
Analysts noted that said the rapid deterioration in the financial condition of mid-sized banks in Europe and the US on growing concerns around large unrealised losses in their bond portfolios seems to be a unique problem of certain banks. These are the same central banks with large bond portfolios relative to the size of balance sheets, concentrated wholesale deposits, and high concentration of long-duration bonds in the bond portfolio, analysts said.
India’s case
The market’s concern around financial stability of US banks has damaged sentiment for the Indian market and Indian banks too, Kotak Institutional Equities said. The BSE Sensex is down 5.7 per cent in the last one month while the NSE Nifty has fallen 5.15 per cent during the same period. The broader index BSE500 has dropped 4.4 per cent for the period.
From India’s point of view, since the fear of a quantitative tightening cycle began in October 2021, the
one-year forward Nifty earnings expanded by 20 per cent, but the index value has fallen 8 per cent during the same period. This has led forward P/E multiple contracting from 23 times to sub-18 times, reflecting the downward force of rising interest rates on stocks. At the same time, India’s GDP has advanced by 24 per cent from October 2021 levels while the aggregate market cap has dipped 7 per cent thereby resulting in the market cap-to-GDP dipping to 94 per cent. Add to that is earnings yield for Nifty on a one year rolled
forward basis, which looks relatively attractive at 5.6 per cent, ICICIdirect said, adding that price to book value has also dipped below long term averages.
The US Fed knew about the repercussions of its steep rate hikes, but was not prepared for a potential banking crisis, said Artha Capital in a note.
“With rapidly rising interest rates, the value of bonds decreases swiftly, and since banks across the world hold assets in the form of bonds, a stubbornly hawkish stance has damaged the value of these assets,
causing panic,” it noted. Unless the Fed comes up with a creative solution to their problems on Tuesday, numerous other banks will join the ranks of SVB, First Republic Bank, and others, it said.
Quantitative easing cycle coming?
ICICIdirect is optimistic. It said quantitative tightening cycle in the US is probably in its last leg with smaller further rate hikes contingent on incoming data. It said recent bank failures have increased the prospects of quantitative easing later in the year on the fear of economy falling into a recession.
“Equity markets typically discount such events well before they actually play out. Hence, as the most
aggressive QT cycle in recent times nears its end, we expect equity valuation contraction in general to slow down from hereon, except for areas that are still extremely expensive and growth expectations are sub-optimal,” it said.
As far as domestic banks are concerned, Kotak Institutional Equities stayed positive on Indian banks and does not see any material negative impact on them from the worsening financial condition of several mid-sized banks in Europe and the US.
“India has seen much lower increase in bond yields and interest rates; Indian banks are vastly different versus
troubled US banks in several important aspects,” it said.
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