European bank stocks rallied after Credit Suisse was offered liquidity financing by the Swiss National Bank (SNB), sparking a rebound in the Swiss bank’s shares.
But the early euphoria was already running out of steam mid-morning as investors questioned whether it would be enough to secure the future of the embattled Swiss lender and calm jitters in the wider market.
The Stoxx 600 banks index rose 1.2% to 144.90 well off earlier highs of 148.44 while shares in Credit Suisse itself advanced 21% to Swiss franc 2.05, off earlier best levels of Swiss franc 2.25.
Sir John Gieve, former deputy governor at the Bank of England, told the BBC that central banks were sending a "message" that such problems would be contained locally.
He added that in Credit Suisse's case, the SNB's action was likely to be enough to stop the crisis spreading.
Neil Wilson at Finalto was not sure that the SNB action would be enough: “We don’t know if Credit Suisse shares hold these gains or if it’s enough to dampen down volatility in the broader market – it seems to have done so far.”
While JPMorgan analysts said: “We see SNB liquidity support as indicated last night as not enough and believe Credit Suisse’s situation is about ongoing market confidence issues with its investment banking strategy and ongoing franchise erosion.”
Barclays said it was an issue of confidence: “As our equity and credit analysts covering Credit Suisse also note, we believe that this crisis is not about asset quality. It seems to be a liquidity crisis, driven by deposit outflows and a steady stream of negative headlines about the Swiss bank.
The bank said it “has the potential to matter considerably at a macro level, if not tackle", as even though the European and US banking systems are far better capitalized than they were in 2008, “in today’s market move, even extremely well-capitalized and healthy European banks are seeing their AT1 bonds drop sharply in sympathy . . . If not stopped, confidence crises can spiral into solvency issues."
“Without decisive action on the liquidity front, markets will ultimately ask the question of 'who’s next', even for banks that currently have the confidence of investors.”
Stock markets are “nowhere near safe territory”, said Russ Mould, investment director at AJ Bell. “It would only take another piece of bad news from the banking sector anywhere in the world to put investors on edge again.”
He agreed that confidence remains key. “While the Swiss bank’s balance sheet is sturdy, its reputation was not. A series of scandals, most of them emanating from its management, has corroded the brand."
Wilson was more confident, saying “once it comes to the central bank saying it will provide liquidity the game is effectively up, but this is not ’08 and Switzerland is not Wall Street or London. They are better capitalised today.”
As for what comes next, he said it would depend on the cause of the trouble, including the massive Swiss outflows. “Does this stop, or reverse? What have the outflows been like – Q4 outflows were huge. Net outflows hit Swiss francs 110.5bn in the fourth quarter, taking the annual asset outflows for 2022 to Swiss francs 123.2bn. Surely the last week has been worse,” he suggested.
The JPMorgan analysts stressed the capital position of Credit Suisse is not the issue, noting it finished 2022 with a CET1 Tier ratio of 14.1% compared to the minimum requirement of 9.3%.
But the US bank's analysts felt “status quo is no longer an option as counterparty concerns are starting to emerge as reflected by credit/equity market weakness.” They suggested action could involve the 8th restructuring since 2011 and potentially a closure of the investment banking business at a cost of 10bn Swiss francs.
However, this process takes time and might not be enough to reduce market concerns at this point, the analysts suggested.
This was one of three scenarios the investment bank highlighted. Secondly, the SNB could step in with full deposit guarantee on all deposits or inject equity giving the bank time to restructure.
However, this would be highly dilutive for current shareholders and would also be a taxpayer risk which might not be acceptable today.
Lastly, a takeover scenario with UBS is a possible option, the JPMorgan analysts concluded.