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Key Takeaways
- Credit Suisse stock plummeted on Wednesday as the Saudi National Bank announced that they would not be providing any further funding to the struggling multi-national
- With concerns mounting over a potential banking crisis after the failure of Silicon Valley Bank, the Swiss National Bank has stepped in and offered Credit Suisse a loan facility of $54 million
- It’s cold comfort for Credit Suisse shareholders, who have seen the value of their stock fall by over 90% over the past decade.
The banking whirlwind hasn’t stopped for days, with Credit Suisse stock dropping 24.24% on Wednesday after their biggest shareholder, the Saudi National Bank, announced that they wouldn’t be providing any additional cash.
Saudi National Bank Chairman Ammar Al Khudairy stated that this was due to the fact that a greater than 10% holding of the company would trigger complications from a regulatory standpoint, but the timing couldn’t have been worse.
Just 48 hours earlier, the banking system narrowly avoided a major systemic risk, as the US federal regulators stepped in to provide protection to depositors at the failed Silicon Valley Bank and Signature Bank.
After the global markets breathed a collective sigh of relief on Tuesday, fears were stoked again when this news looked to have the potential to topple Credit Suisse, one of the 50 biggest banks in the world.
Concerns were rising that this could kick off the banking crisis that had been narrowly averted on Monday, until the Swiss National Bank stepped in with a loan of $54 billion.
As a result, Credit Suisse stock soared on Thursday and was up almost 12% in early morning trade.
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Credit Suisse’s recent stock movements
Let’s cut to the chase. Credit Suisse stock has a horrible place for investors to be. Over the last 12 months it’s down almost 80%, and the further back you go, the worse it gets. Shareholders who’ve stuck with the company for the last 10 years will have seen their position fall by 93.53%.
That’s incredible. And not in a good way.
After falling over 50% in the space of two weeks at the outset of the pandemic, Credit Suisse’s stock price did rally hard throughout the rest of 2020. It went from trading around $6.61 in late February 2020, to hitting a high of $13.38 (+102.42%) almost exactly a year later.
That run wasn’t sustainable though, and by mid-2022 the stock was back trading in the $6 range. On Thursday, it closed at $1.88.
Concerns over banking sector
The past week has seen major concerns over the banking sector, with markets straining under the pressure. The initial sell off was triggered as a result of the collapse of Silicon Valley Bank and Signature Bank, and the bank runs that caused these failures.
While neither of those banks are considered ‘systemically important’ the concern was that their failure would create a domino effect of failures across hundreds of other smaller, regional banks.
If the regulators hadn’t stepped in to guarantee the deposits, it’s likely that we would have seen a mass exodus of deposits into the ‘too big to fail’ banks, which could have caused dozens or even hundreds of bank runs across the country.
With markets beginning to regain some composure on Tuesday, the announcement from the Saudi National Bank reignited fears of bank failure and the contagion effect.
The problems at Credit Suisse aren’t new. Unlike the issues with SVB and Signature Bank, the issues facing Credit Suisse are widely known and understood. While a failure of the bank wouldn’t come as a complete shock to the market, there’s no denying it would still be a major event which would rock confidence in the banking sector.
The Swiss National Bank lifeline
These concerns will be put on pause at the very least, as the Swiss National Bank has now offered the bank a loan of 50 billion Swiss Francs (US$54 billion).
This liquidity injection from the Swiss central bank provides additional support to the bank, which is considered a “globally systemically important bank” by the Swiss regulator.
As well as providing the funding, the Swiss regulator also stated that there are “no indications of a direct risk of contagion for Swiss institutions due to the current turmoil in the US banking market.”
Analysts from JPMorgan provided details around the options for Credit Suisse on an investor call on Wednesday prior to the announcement, but stated that it was unlikely that the bank would be allowed to fail due to its importance to the Swiss banking system.
What this means for investors
For long suffering Credit Suisse investors, it’s more of the same. Continued problems with the bank and poor returns are par for the course at this stage, but there’s always the possibility of a turnaround in the future.
For banking stocks more broadly, it’s not been an easy time either.
It appears that any immediate danger to the banking sector has passed, but it’s not to say that more issues aren’t going to surface. Depending on the Fed’s decision on interest rates at the next FOMC meeting, we could see continued pressure on banks who are struggling to grow their loan books with interest rates so much higher.
The banking system itself isn’t going anywhere, but the challenge for investors is picking the banks who are likely to survive, and thrive, during the volatility.
The bottom line
With volatility comes opportunity. As the well-trodden Warren Buffet quote says, “Be fearful when others are greedy and greedy when others are fearful.” And right now, there’s a lot of fear around.
And while that fear means investors have a chance to make big gains, it means the potential for big losses too. The best way to protect against this is through diversification. Spreading your investment assets across a range of different stocks and asset classes, means less potential for crazy explosive gains, but also less chance for catastrophic losses.
Another way to protect on the downside is through hedging. This can be difficult to do for regular investors, but accessing it can help reduce the risk on your portfolio, while keeping most of the gains.
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