How safe is Credit Suisse?

how-safe-is-credit-suisse

According to the above presentation for fixed income investors of Credit Suisse the bank is less dependent on counterparty funding. Instead it has core customer deposits and long-term debt making up a larger proportion of balance sheet.

I don’t like this statement of the Credit Suisse CEO today (Interview with NZZ):

He’s asked are customer deposits (so crucial according to the above graph) leaving Credit Suisse in last days, weeks. He doesn’t say no, but says employees are doing a great job, that is diplomatic for yes, in my opinion.

credit-suisse-tidjane

Also this in another important sunday paper in Switzerland:

Basically saying: Swiss customers are transfering money to safer banks, like ZKB (with cantonal guarantee “Staatsgarantie”). It also notes, that UBS didn’t nearly fail in 2008 because of capital, but because customers and especially counterparties were pulling billions out daily.

schweiz-am-sonntag-credit-suisse-kunden-ziehen-gelder-ab

In conclusion:

  • The CEO doesn’t deny they are seeing outflows
  • The banks capital is in better shape than in a long time
  • The CEO seems to think Q2 results shoud reassure investors
  • At the same time he states that we’ve only seen one quarter of twelve quarters of the transformation process
  • If Q2 doesn’t reassure investors I wouldn’t be surprised to see floodgates open
  • Time is a luxury Credit Suisse doesn’t have; so point 4 above could be rendered mute by reality.
  • In my view, and to reassure customers of the “crown juwel” (according to Tidjane Thiam), the Swiss Universal Bank should be granted temporary state guarantee. This would stop outflows. It would give the CEO the urgently needed breathing space. — Problem: At what price could this state guarantee be made?  Is it legally possible? Would CS shareholders have to take a large write-off?
  • It’s not the CEOs fault

Which banks are suffering most 2016

This bubble diagramm gives a good impression of which banks, by market cap have suffered most this year.

The highest percentage losers are the ones that the market thinks are most likely to fail, need bail-outs, increase capital – or generally put: Which will be first to fall off the cliff.

Unicredit, RBS, Credit Suisse, Deutsche Bank, Barclays, UBS – in that order – are considered unsafest by shareholders, currently.

In a normal capitalist world, these weak banks may see themselves in a death spiral or at least in a negative feedback loop. If you have a lot of money parked with those banks you will be asking yourself the question, is it safe there, should I risk having large liquidity there? Do these banks have derivatives or property investments or loans that will suddenly wipe out the capital, like in 2008 after it began to look dodgy in 2007.

I’ve read lots of articles stating people are worried about a reoccurence of 2007-2009 in last hours and days. Whether it materialises or can be circumvented is a very open outcome. But investors and people in general react by moving on the rumour.

If you’re in a herd and it starts running, I assume in 9 out 10 cases there is a predator lurking somewhere.

20-grossbanken-wertveränderung

Deja Vu with Brexit – Standard Life Fund Freeze – Pre Bear Stearns Moment – the Lehman Moment can still come

If you like working through the worst case scenario it would probably be sensible to consider the Brexit Vote the beginning of problems to come.

http://www.telegraph.co.uk/investing/funds/standard-lifes-29bn-commercial-property-fund-halts-trading-as-wi/   (Telegraph Group Business Editor James Quinn is doing a great job of reporting effects of Brexit!)

Trading in a £2.9bn commercial property portfolio managed by Standard Life Investments has been halted after a flood of withdrawals exhausted the fund’s cash reserves.

Standard Life said the move followed “an increase in redemption requests as a result of uncertainty following the EU referendum result”.

Details were not provided on the current liquidity position or on whether any buildings would now be sold.

The latest figures for the portfolio, from May 31, show the fund held 13pc in cash. Much of this may have been paid out to departing investors.

In the ten days since Brexit two other commercial property funds – run by rival managers Aberdeen and Henderson – have cut almost £300m from the value of their holdings. Freezing withdrawals is the “next step”, commentators say.

Time line – Bear Stearns Hedge Funds Collapse (we could be at the moment in time: June 2007 – meaning we won’t see the worst to come untill 2017 or early 2018. These things don’t unravel in a few days.)

http://www.investopedia.com/articles/07/bear-stearns-collapse.asp

July 5th update:

Telegraph.co.uk: “Three property trusts, including Standard Life, M&G Investments and Aviva Investors, have suspended trading. The suspensions now account for more than a quarter of the £35bn-sized sector.”

Telegraph.co.uk: “Andrew Bailey, the new head of the Financial Conduct Authority, also attempted to ease concerns around the property sector, saying the actions taken by the property funds was not a “panic measure.” Mr Bailey, until last week the head of the Bank’s Prudential Regulation Authority, said the purpose of suspending redemptions is to allow a funds’ underlying assets to be revalued.” <– not a panic measure. No, just an indication that a haircut of unknown proportion is likely to follow. That is not something that is a calming thought to the owners of properties or property fund holders. — The big question: Will a self-fullfilling prophecy ensue. Worried people, pessimistic people selling because they are told they can’t sell. If a large proportion of your net wealth is in property, wouldn’t it be prudent to now take money of the table with property prices still high? I think so. — Mostly, if a ball gets rolling, it’s velocity doesn’t slow down. — Except the CHF vs EUR, that ball is being held by the SNB. The problem is: That ball is getting larger. — It reminds me of my attemps as a child to dam a little stream in the Swiss Alps. Just a question of time before pressure builds up and flushes away the dam. — But maybe the dam is so strong the SNB is building, that the safety seeking liquidity will go to Gold and other markets…

 

Marketwatch has it summed up nicely:

“What’s happening?”

“Standard Life Investments on Monday was the first to halt trading in its open-ended property fund. Aviva moved to suspend trading in its fund Tuesday, followed minutes later by M&G. Observers expect other U.K. real-estate funds to follow suit.”  (My view: aka Domino-effect, trickle-down-effect, contagion, you name it, it’s happening. It’s also going to be enough that buyers pause, to leave the sellers quickly swelling in number…)

“Redemptions can put a strain on such open-ended real-estate funds. Unlike stock funds, they can’t move to quickly liquidate holdings to meet redemptions. Most carry significant cash cushions, but those appear to have been sharply eroded. Complicating matters, unlike stocks, properties can be hard to value and liquidate during times of stress.”

 

Impact of Credit Suisse Credit Rating Downgrade – CHF 1.2 to 4.2 billion

Keep in mind that we’ve seen 1-2 notches this year already. And that the below filing is for FY2015. You’d be surprised how many educated people don’t understand that ratings downgrades will impact the safety of their bank deposits indirectly.
From SEC filing:
CREDIT RATINGS
Our access to the debt capital markets and our borrowing costs depend significantly on our credit ratings. Rating agencies take many factors into consideration in determining a company’s rating, including such factors as earnings performance, business mix, market position, ownership, financial strategy, level of capital, risk management policies and practices, management team and the broader outlook for the financial services industry. The rating agencies may raise, lower or withdraw their ratings, or publicly announce an intention to raise or lower their ratings, at any time.
Although retail and private bank deposits are generally less sensitive to changes in a bank’s credit ratings, the cost and availability of other sources of unsecured external funding is generally a function of credit ratings. Credit ratings are especially important to us when competing in certain markets and when seeking to engage in longer-term transactions, including >>>over-the-counter (OTC) derivative instruments.
A downgrade in credit ratings could reduce our access to capital markets, increase our borrowing costs, require us to post additional collateral or allow counterparties to terminate transactions under certain of our trading and collateralized financing and derivative contracts. This, in turn, could reduce our liquidity and negatively impact our operating results and financial position. Our internal liquidity barometer takes into consideration contingent events associated with a two-notch downgrade in our credit ratings. The maximum impact of 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 CHF 1.2 billion, CHF 3.1 billion and CHF 4.2 billion, respectively, as of December 31, 2015, and would not be material to our liquidity and funding planning. If the downgrade does not involve all three rating agencies, the impact may be smaller. In January 2016, Moody’s Investors Service downgraded the long-term ratings of Credit Suisse AG and its affiliates by one notch.
Potential cash outflows on these derivative contracts associated with a downgrade of our long-term debt credit ratings, such as the requirement to post additional collateral to the counterparty, the loss of re-hypothecation rights on any collateral received and impacts arising from additional termination events, are monitored and taken into account in the calculation of our liquidity requirements. There are additional derivative related risks that do not relate to the downgrade of our long term debt credit ratings and which may impact our liquidity position, including risks relating to holdings of derivatives collateral or potential movements in the valuation of derivatives positions. The potential outflows resulting across all derivate product types are monitored as part of the LCR scenario paramaters and the internal liquidity barometer reporting.
https://www.sec.gov/Archives/edgar/data/1053092/000137036816000114/a160324ar20f.htm

Disaster Zone Credit Suisse Strategic Resolution Unit – the Banks Trashcan

Credit Suisse speaks of core results and then separately of the revenues and expenses from the Strategic Resolution Unit (SRU). But they seem to use this wind-down unit for moving regular occuring problem loans and non-performing loans that were reported in other core units in previous quarters. (see graphs from the quartely reports near the bottom of this post, where movements are documented in the footnotes of the financial statements.)

It’s very interesting to see that this units losses eclipse all profits quarter by quarter. Not surprising if all the good business is in the core results and all the bad business is moved to the Strategic Resolution Unit. “The Strategic Resolution Unit consolidates the remaining portfolios from the former non-strategic units plus additional businesses and positions that do not fit with our strategic direction. ”

If they were loosing money with this unit in stable Q4 15 and somewhat less stable Q1 16 what will have happened in more volatile Q2? There seems to be a high likelihood that whatever problems arise, they will find their way to the SRU.

Also note: This problem bank within Credit Suisse Group employes close to 1500  people! Corporate center, that manages about the same amount of assets has 350 employees.

credit-suisse-strategic-resolution-unit

strategic-resolution-unit strategic-resolution-unit_0 strategic-resolution-unit_2 strategic-resolution-unit_3 strategic-resolution-unit_4 strategic-resolution-unit_5 strategic-resolution-unit_6 strategic-resolution-unit_7 strategic-resolution-unit_8 strategic-resolution-unit_9 strategic-resolution-unit_10

Bank CDS in Focus – Credit Suisse and UBS Credit Default Swaps Post-Brexit

Sometimes a good graph saves a lot of words. That’s why I’m posting these. Normally I’m no fan of CNBC, as they overdramatize to keep viewers and sell advertising. But I really liked their graphs!image1

I just can’t imagine the moves in RBS, Barclays and Lloyds are justified.image2

image3

Interesting about this one; GS has held up better than Morgan Stanley and BofA. So this isn’t about revenue from europe for US Banks. For the stock market it would be more pertinent to show leverage ratios or CET capital ratios of the banks versus the drop. I know I would be looking at the capital cushion when deciding whether to take aim at a bank.image4

Important addition:

CDS on June 27th (according to my source)

Credit Suisse Group
1Y = 111
5Y = 170
10Y = 202

UBS
1Y = 43
5Y = 82
10 Y = 121

Shows you that Credit suisse is double as dangerous as UBS. Or UBS is seen as really safe.

This one was aired later:

euro-stoxx-banks-brexit-bottom-or-beginning

Makes me think we’re at or near the bottom!!!

SMI Future am 24. Juni 2016

SMI-future-24-juni-2016

Interessante Tatsachen:

  • Noch vor Börseneröffnung waren die besten Kaufkurse.
  • Innerhalb von 15 Minuten nach Future Handelseröffnung um 8.00 Uhr war bereits 1% korrigiert.
  • Innernhalb von 60 Minuten und  bei Akiten Handelseröffnung um 09.00 Uhr waren bereits 2% korrigiert.
  • Innerhalb von 90 Minuten waren 4% der Korrektur bereits wieder ausgepreist.
  • Innerhalb von 180 Minuten hat der SMI Future um fast 6% zugelegt, im Vergleich zur Eröffnung.

Anekdote:

  • Um 8.10 Uhr versuchte ich telefonisch eine der Depotbanken zu erreichen; ich wurde nicht durchgestellt, bzw. der Anruf (von Handy und von Festnetz) wurde durch das Bank-Telefonsystem nicht durchgestellt, da überlastet.
  • Erst um ca. 8.12-8.14 Uhr via Email konnte ich einen Auftrag platzieren
  • Um ca. 8.17 erhielt ich die Email Bestätigung für das Buy Open.
  • Um die gleiche Zeit konnte ich die Bank telefonisch erreichen.
  • Um 10.05-10.10 habe ich die Future wieder geschlossen (Sell Close).

Lektionen:

  • Eine Bank mit Möglichkeit zu elektronischer und telefonischer Futures-Auftragsaufgabe  wäre wünschbar.
  • Ich habe einen Teil des Futureskaufes limitiert, was rückblickend schade war (7350 Limite) und eine von einem Hedge Fond Manager namens Guy Spier gehörte Regel, versuchen den Kurs bei Auftragsaufgabe NICHT zu berücksichtigen (wobei er ein Value Investor ist, der immer viel langfristiger orientiert ist).
  • Da ich nicht aggressiv genug gekauft (die volle Size) habe, habe ich den Gewinn stark eingeschränkt (mein Risiko natürlich auch).

SMI – no recession priced

SMI-index-since-june-2006

Looking at the above chart and comparing the current move to what we saw in 2008 and 2009 I believe the reaction so far is much too weak to signal a bottom.

It’s more likely to be a drawn out process of sideways without negative news, then down on actual impact of heavy handed EU reactions.

Should the EU make Britain a good deal, then we’re off to the races again. But I would not consider that most likely, even though it would be best for the world economy. Sadly it wouldn’t be good for socialist or left governments, which is why I am afraid we’ll see them hurt their countries.

Why free movement of people (leading to work hotspots and countries) has to be one of the cornerstones of the EU when modern economies that can network their offices, use robots, telecommute, telework, etc, is  beyond my comprehension. But that’s politics. The charts (graphic form of what people think), tells me they are not expecting anything really negative in Switzerland and see the index as a safe haven.

We’re in year 1 of 3 years of growth trouble, is my current feeling. Even if the central banks can and will put a floor in asset depreciation. I’m not convinced they have a magic wand to improve profitability and dividends. They can prop up bonds and give them fairy price levels. And the SNB can fight CHF strength. But the SNB can’t save the EU on it’s own.

Seeing opportunity when others see negative headlines; example a cat in Ermatingen (where my business is based)

The last few days the Thurgau has been hit by heavy rainfall leading to light flooding. Reading the papers you’d get the impression this was just a horrible time for everyone. But it’s not. I have not seen more kids playing along the lakefront in the last 4 years. The puddles or flooded road sections and gardens are an absoulte treat for them: Close to home, safe (more or less).

ermatingen_enjoy_1

What is normally sand and therefor beach volleyball is now water volleyball. (life gives you lemons, make lemonade mindset)

ermatingen_enjoy_2

The following photos (I took on the afternon/evening of June 20th 2016) are a good example of what an independent asset manager is; like the cat an opportunistic hunter who seeks a chance to profit no matter what circumstances pop up. The cat either found a dead frog or maybe a drowned mouse or other small rodent. A cat is always in the mindset: If something interesting comes along, I’ll take a look. – I think that’s not bad advice for anyone watching the capital markets too.

cat0_ermatingen cat2_ermatingen cat1_ermatingenca3_ermatingen