UBS’s Credit Suisse deal: Bloomberg Intelligence considers what’s next for Europe’s banks?

by | Mar 20, 2023

Fears over Credit Suisse’s liquidity, a return to crisis-era-style bank runs at Silicon Valley Bank and plunging policy-rate expectations mark a tumultuous week for EU banks. After the sector’s €100 billion plunge, led by CS but with 15%-plus declines for others including BNP Paribas and Societe Generale, Bloomberg Intelligence has noted the lenders’ strengthened capital and liquidity positions since 2008 when assessing valuation as detailed below:

Philip Richards, BI Senior Industry Analyst (Banks), comments: “UBS’s government-backed 3 billion-franc acquisition of Credit Suisse and provisions of more than €150 billion of liquidity support by the Swiss National Bank should stem panic and contagion from spreading across European banks. But lenders’ 10-20% lower share prices since Silicon Valley Bank’s woes emerged show that scars remain.”

Credit Suisse’s Woes Replace Recession as Top Discount Driver

Credit Suisse’s concerns surrounding liquidity and capital in the aftermath of Silicon Valley Bank’s collapse, its own restructuring – a 40% investment-bank asset cut – and prior capital raise have precipitated the lender’s plunge to the bottom of European bank rankings based on 2024 consensus price-to-book multiples, trading at less than a fifth of book value. By contrast, receding recession fears in Germany position Deutsche Bank’s and Commerzbank’s P/B values to lift from the bottom of the range. The prospect of fewer rate hikes in the wake of SVB has weighed across the sector.

The business outlook has brightened in Europe’s largest economy, with the gauge of expectations from the Ifo business-climate index up for the fifth straight month in February.

Value or Value Trap as Barclays, UniCredit Plunge Below 5x P/E?

After a painful week of 10-20% share-price declines across the board, European banks’ consensus price-to-earnings ratios have fallen below historical averages, while 2024 estimates remain vulnerable to revenue downgrades as the expected peak in policy rates is slashed. Within the spectrum of valuations, the usual suspects – wholesale-funded lenders (Barclays, Deutsche Bank and Societe Generale) and some universal banks (Banco Santander and UniCredit) – are valued at sub-5x 2025 earnings, toward the bottom of long-term averages.

As the market grows more comfortable with the largest lenders’ ability to weather mounting credit-loss expectations, BI thinks EPS upgrades and capital returns could bring them back into favour. Digital efficiencies and active capital management may support returns on tangible equity.

Panic, 15%-Plus Drops Reflect Deep-Rooted Problems

Contagion fears radiating from Silicon Valley Bank to Credit Suisse and shares plunging 15% or more for an array of lenders, including stalwarts Societe Generale, Commerzbank, ING and BNP Paribas, make it clear that the multitude of support measures meant to underpin confidence in the European banking system has room for improvement. Strengthened capital, liquidity and risk management at the lenders, along with more stringent regulatory oversight, were meant to prevent bank runs and panic from spreading throughout the sector. But the events following SVB’s demise show that hasn’t been an unequivocal success.

Key questions in the coming months include whether even higher capital and liquidity needs are required or banks’ dividend and share-buyback ambitions should be reined in.

Credit Suisse 48% Price-Target Cut Tops Pain List; Peers Rebound

Price targets for European banks have increased 13% at the median over the past six months, fuelled by double-digit upgrades to revenue and EPS estimates, despite fears of a pickup in the cost of risk. The likelihood of fewer policy rate hikes in the aftermath of SVB’s collapse could cause those targets to edge lower in the coming months. Just four of the leading 27 banks had ambitions cut in the period, topped by Credit Suisse’s 48%.

Goal revisions are skewed favourably toward lenders with the most upside to consensus net interest income as rates rise, with buyback potential an added driver. UniCredit (up 57%) and Commerzbank (45%) lead the way. The sector trades an average 34% below price targets after the recent selloff – toward the top of its long-term range.

 

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