What happened
Shares of several large European-based banks fell this morning after shares of the embattled Swiss lender Credit Suisse (CS) tanked by as much as 25% this morning, spooking the entire sector.
Shares of the German bank Deutsche Bank (DB 0.70%) were trading roughly 8.7% lower at 10:44 a.m. ET today. Meanwhile, shares of the Spanish lender Banco Bilbao Vizcaya Argentaria (BBVA -1.55%) traded roughly 10% lower, while shares of the large Dutch bank ING Groep (ING 1.00%) were down about 9.2%.
So what
The global banking sector has been on edge since last week, when Silvergate Capital (SI), SVB Financial (SIVB.Q -1.96%), and Signature Bank (SBNY) collapsed in a span of just days. Those banks faced a run on deposits and then had to sell bonds at losses to cover the outflows.
Image source: Getty Images.
Credit Suisse, on the other hand, plunged after its largest shareholder, the Saudi National Bank, said it wouldn't pledge any additional support through purchases of equity.
"We cannot because we would go above 10% [of outstanding shares]. It's a regulatory issue," said Saudi National Bank Chairman Ammar Al Khudairy, according to Reuters. Going above a 10% stake would likely lead to additional reporting requirements and other rules from regulators. Al Khudairy did, however, say that he is happy with Credit Suisse's proposed transformation plan and also that he doesn't think the bank will need additional funds.
The cost of credit default swaps (CDS) on Credit Suisse, which essentially serve as insurance against the bank defaulting, climbed this morning, with five-year CDS spreads widening to new highs from 5.49% to 5.74%.
Joost Beaumont, head of bank research at ABN Amro, said that the decline in Credit Suisse's stock and bonds means that "investors judge that this bank needs to be rescued."
"If regulators do not handle the Credit Suisse situation well, this will send shockwaves through the whole sector," Beaumont added. "To make matters worse, both sides of the Atlantic have banking issues."
Credit Suisse had more than $580 billion of assets at the end of 2022, which is more than double the assets of SVB and would make its failure the largest ever. The bank also serves a much wider range of clients, so the fallout would likely be much more severe.
Investors have been very concerned about Credit Suisse since they discovered that Chairman Axel Lehmann's comments in early December about client outflows in the bank's wealth division stabilizing may not have been entirely accurate. In Credit Suisse's annual report, released yesterday, the bank says, "Outflows stabilized to much lower levels but had not yet reversed as of the date of this report."
Now what
Credit Suisse is definitely in trouble if it can't soon reverse outflows in its wealth division, which is a big part of what makes the bank valuable and a centerpiece of Credit Suisse's transition plan. It doesn't help that investors are keeping an extra-close eye on banks, given everything that has recently transpired.
A failure of Credit Suisse would certainly be a systemic event that would hurt other European banks. That said, I don't think we are quite there yet, and the good news is that regulators are on high alert, whereas the SVB and Signature situations really caught everyone by surprise and happened very fast. Still, nothing can be ruled out in the current environment.
As stand-alone banks, I don't see anything particularly wrong with Deutsche Bank, ING, or BBVA. None of them have been spectacular performers over the years by any means, but I have actually been somewhat bullish on Deutsche Bank, given how much it benefits from rising interest rates, and ING, given its strong capital position.
Ultimately, investors should definitely keep a close eye on Credit Suisse because its failure would hurt many other bank stocks, especially in Europe.
