One year after the crisis, European banks are in the best shape

A year ago, the banking sector experienced an unprecedented shock since 2008, with the bankruptcy of three American regional banks (Silicon Valley Bank, Silvergate and Signature) and the disaster takeover, orchestrated by the public authorities, of Credit Suisse , on the verge of collapse, by its direct competitor UBS.

A year later, what has changed? “Nothing, except the disappearance of Crédit Suisse and three regional banks!” laughs Jérôme Legras, director of research at Axiom Alternative Investments (AI), a management company specializing in securities and financial debts.

“The banking sector tends to have Schumpeterian behavior where bad apples are regularly eliminated from the system”, he adds. In fact, the chronicle of the events of March 2023 leaves little room for doubt. In the United States, Silicon Valley Bank (SVB) and others were banks with haphazard asset/liability management, to say the least, with concentrated deposits that could be withdrawn at any time, and assets made up of government bonds. fixed rate, depreciated by rising rates. Not to mention that they were very little diversified in terms of clientele.

Banks never so profitable

As for Credit Suisse, it was indeed the sick animal of the European banking sector which accumulated fines, litigation and complicated situations and credit losses in its American investment banking subsidiary. “What everyone had difficulty understanding is why Credit Suisse did not fall six months earlier or six months later even though it had a lot of capital and liquidity”remembers a banker.

The collapse of Credit Suisse was undoubtedly a trauma in Switzerland, as was the bankruptcy of Swissair in 2001. It also shook the booming AT1 subordinated debt market before it regained its footing and regains the appetite of investors. In fact, this bankruptcy of Credit Suisse had no major impact on European banks.

On the contrary ! “ These events came at a time when banks have rarely ever been in such good health. It’s even the first time in fifteen years that they have achieved profitability higher than the cost of their equity.”, notes Jérôme Legras. The end of the negative rate policy throughout the world allowed the banking sector, by nature highly capitalized, to bounce back and see its interest income soar sky high (except for French banks given the weight of low-rate loans). fixed).

Stock market rebound

As a result, once the stupor passed, European banking stocks gained 23% in 2023, according to the SXP7 index, and 13% more since the start of the year. And again, with valuation multiples still low, of the order of 0.9 times net assets, European banks retain a potential for revaluation, especially as they engage in relatively generous distribution policies to shareholders. According to the credit rating agency S&P, the results of French banks should even strengthen in 2024, after a mixed year 2023 due to the poor performance of retail banking.

Another reassuring sign: UBS's stock market performance, with an increase of more than 55% in the share price over one year. This means that the takeover of Credit Suisse was ultimately a very good deal and that the bank's problem was above all a management problem. Because, beyond the repeated scandals, Crédit Suisse is above all a very good franchise in wealth management and a solid retail bank.

From this episode, no reform is to be expected in Europe in terms of regulation or crisis resolution. Like everything worked the way it was supposed to work. Certainly, the Swiss authorities have put in place a rescue system “a little limited”, according to the expression of many observers at the time. But, despite everything, the rescue took place, more or less, as predicted by the resolution mechanism, except for the fact that Credit Suisse shareholders received 3 billion euros instead of zero. It was ultimately the AT1 bond holders who paid the bill (16 billion Swiss francs).

Business as usual

Has the banking sector become risk-free? There will always be banks that are poorly diversified and overexposed to risks. In the United States, too many regional banks are overexposed to the risk of commercial real estate in crisis, as evidenced by New York Community Bank (NYCB) which has lost 65% of its capitalization since the start of the year.

According to a JP Morgan study, regional American banks are four times more exposed to commercial real estate than large American banks (30% of assets compared to 6.5%). Let us also remember that in the United States, the bankruptcy or disappearance by absorption of a regional bank is part of the routine of a sector that is still largely fragmented.

In Europe too, there are vulnerabilities. After Credit Suisse, short sellers tried to attack Deutsche Bank. Without success. The stock of the German bank has even gained almost 50% over one year. However, there are still European countries where there are medium-sized banks, generally unlisted, which remain insufficiently profitable and exposed to the slightest shock. This is particularly the case for Germany.

Political risk

But overall, Europeans are happy to welcome the numerous prudential safeguards put in place since the financial and banking crisis of 2008. The banks are largely capitalized, but above all, there is no bubble, whether overindebtedness of companies or Household. The economic situation has not deteriorated over the past year either, and it is even better today in the United States.

Finally, the good health of the banking sector in Europe could even represent a risk in itself. “There is still a political-regulatory ambiguity between the State, the regulator and the shareholders on the sharing of the increased profitability of the banks and their excess capital”believes Jerôme Legras.

The implementation or the project of exceptional taxes, or the declarations on the optimum amount of compulsory reserves (unpaid) with the bank, could have caused stock prices to sway. Many of these initiatives, however, fizzled, as in Italy. And the momentum bullishness of the sector seems intact.