Following the recent bank crises in the US and Europe, Antipodes has identified “relative winners and outright losers” in global financials.
What led to the collapse of Silicon Valley Bank and Credit Suisse has been the topic du jour in recent weeks, and while the mistakes and missteps will likely continue to be analysed for some time, we think investors’ time can be better spent considering the influence of these events on global financials – and global markets more broadly – in the months and years to come.
The crises have brought to the fore major risks that can’t be ignored, but somewhat counterintuitively, they have also underscored some interesting opportunities in global markets.
In the United States we remain underweight financials, and there will be outright losers and relative winners in the wake of SIVB and the consequent implications.
The outright losers
Regional banks will continue to face major challenges.
San Francisco-headquartered First Republic Bank has received a lot of attention. Unrealised losses could equate to more than 15% of the face value of the bonds they’re holding, and almost two thirds of their deposits are from corporates – these are flighty deposits that can leave quickly. There are several other regional banks in a similar situation.
Another name to watch is Charles Schwab. Most people think of Schwab as the leading retail broker in the US, but it is a large bank.
Let’s flip it around and assume depositors don’t leave, and Charles Schwab has to pay higher interest rates to keep its customers. If they pay on average 2% on deposits, Schwab’s profits will evaporate. This is a real problem for Schwab given most of its competitors already pay cash rates above 2%.
The relative winners
Banks that have sufficient liquidity, sticky deposit bases and strong core transactional relationships, will emerge from this period as relative winners. Certain deposits will leave the system for alternatives such as cash management and money market accounts, but the majority of deposits that move from weaker banks during this period of heightened concern will (and is) moving to other banks.
The relative winners resulting from this movement in lower cost funding will be large banks, known as ‘money centre banks’ – JP Morgan, Bank of America, Wells Fargo and Citi.
While there are some mark-to-market losses to be faced by those banks, Antipodes’ view is that the risks of wide-scale problems are minimal.
However, for investors seeking to build attractive-priced exposure to global financials amid the recent turmoil, we think the best opportunities can be found outside of the United States.
US and European financial systems are not the same
While the Silicon Valley Bank collapse and Credit Suisse takeover are often discussed analogously, investors should keep in mind the landscape for financials in Europe is very different to the United States.
The extent of asset liability mismatch is specific to US financials as the structure of the European banking system is different. European banks have a dominant share of savings and lending, which makes it less likely for deposits to leave the system.
Thus, we think the issues surrounding Credit Suisse are bank specific.
Credit Suisse was already suffering from a crisis of confidence after losing 40% of deposits in 2022, the bulk in the fourth quarter.
Two banks we hold and remain attractive long term investment opportunities are Italy’s UniCredit (BIT: UCG) and Dutch multinational ING Group (AMS: INGA).
Both have significant excess capital levels. For example, UniCredit has a tier one capital ratio of 16% which is probably, on average, double the US banks on a mark-to-market basis.
It also has about 30% of its market cap in excess capital, of which two thirds will be distributed to shareholders this year, it is priced on a very low price-to-book and delivers double digits returns on equity. The company has a well-communicated capital management plan which could see 80% of the company’s market cap returned to shareholders in dividends and buy backs over the next four years.
The key concern in Europe is financials leaning into the commercial real estate market – a stretch for yield in a market where we’ve seen certain lower-grade office properties trade at 3% yield.
So we’re spending time to find out who’s funded those loans and interrogating the equity of the companies who have received those loans.