A Bank Crisis or The Buying Opportunity of 2023?

Are we looking at a bank crisis or an excellent buying opportunity? Read on for our thoughts.

All central banks have said they will provide whatever liquidity ‘is needed’.

Despite the Fed stepping in with ample liquidity, investors pulled back from positions in First Republic and other bank shares last week amid lingering concerns over the state of the U.S. banking sector.

The Dow Jones Industrial Average lost 384.57 points on Friday, or 1.19%, to close at 31,861.98 points. The S&P 500 slid 1.10% to end at 3,916.64 points, while the Nasdaq Composite was down 0.74% to 11,630.51 points.

First Republic slid nearly 33% to end the week down close to 72%. That marked a turn from Thursday’s relief bounce, which came when a group of banks said it would aid First Republic with $30 billion in deposits as a sign of confidence in the banking system.

Friday’s nosedive weighed on the SPDR Regional Banking ETF, which lost 6% in the session and finished the week 14% lower.

U.S.-listed shares of Credit Suisse closed down nearly 7% as traders parsed through the bank’s announcement that it would borrow up to $50 billion francs, from the Swiss National Bank. The stock lost 24% over the course of the week.

Germany’s Dax closed off 1.3 per cent. France’s CAC 40 dropped 1.4 per cent, while here in the UK the FTSE 100 was 1 per cent lower.

Asian markets closed before the mood soured, leaving Japan’s Topix up 1.2 per cent and Hong Kong’s Hang Seng 1.6 per cent higher.

The financial world hasn’t seen a week like this since 2008, with turmoil in the banking sector igniting fears that the global economy is on the brink of another crisis.

For those who didn’t experience the last financial crisis, the fast-moving situation can be confusing — and more than a little unnerving.

However, leaders of central banks across the world, from the Federal Reserve’s Jerome Powell to the European Central Bank’s Christine Lagarde, have assured the public that the recent turmoil does not herald a repeat of 2008.

So far, this looks to be true. JPMorgan Chase & Co in a note said that the Federal Reserve’s emergency loan support, Bank Term Funding Program, can put in as much as $2 trillion of funds into the US banking system to help the struggling banks and ease the liquidity crunch. That is a lot.

In a statement issued by the bank, it said that the largest banks are unlikely to tap the program. It’s there if they need it, but they probably won’t.

This is why we currently believe this to be a good buying opportunity. As we said, things move fast, but right now everything is being done to keep liquidity in the system.

Credit Suisse gave up early gains on Friday morning and the Euro Stoxx Bank index ended down 2.8 per cent.

The Swiss will be rescued and it is now a very attractive prospect for a bigger bank to take it on. That bank is, and all signs point towards it being, UBS.

Confidence in the global banking system has been shaken and things are still changing rapidly, but meetings are being held this weekend to assess various scenarios for its future.

Step up UBS. The huge Swiss bank is in discussions to take over all or part of Credit Suisse, with the boards of Switzerland’s two biggest lenders set to meet separately over the weekend to consider what would be Europe’s most consequential banking combination since the financial crisis.

The Swiss National Bank and regulator Finma are orchestrating the negotiations in an attempt to shore up confidence in the country’s banking sector. Their intervention comes days after the central bank provided an emergency credit line to Credit Suisse.

However, this failed to arrest a slide in its share price, after its largest investor ruled out providing any more capital and its chair admitted that an exodus of wealth management clients had continued.

The share price performance of the two Swiss lenders has diverged significantly in recent years. Over the past three years, UBS shares have gained about 120 per cent while those of its smaller rival have plunged roughly 70 per cent.

The former has a market capitalisation of $56.6bn, while Credit Suisse closed on Friday with a value of $8bn. In 2022, UBS generated $7.6bn of profit, whereas Credit Suisse made a $7.9bn loss, effectively wiping out the entire previous decade’s earnings.

Swiss regulators told their US and UK counterparts on Friday evening that merging the two banks was “plan A” to arrest a collapse in investor confidence in Credit Suisse, one of the people said.

UBS stepping in could well be the start of a new beginning for what was CSFB. If a deal is completed, then the fall in share prices for European banks may well have been overdone. A high interest rate environment actually favours banks and this is why we saw and early year rally. If this ‘banking crisis’ can be contained to a few US lenders then that value will be back on the table.

This would see a rise in the FTSE and the CAC in the mid-term. Many of our traders were short into the drop at the end of last week which made some good profit for your portfolios. However, most it would seem, are now buying into the market and this is a sentiment we share.

Confidence won’t return immediately, that’s just not how it works. BUT, it will return and we should get a decent rally over the next month or so. Often, we just have to be patient. This is not a repeat of 2008, nor is it Covid, it’s potentially not really anything to worry about this side of the Atlantic. There is fear and panic, and as the great Warren Buffett famously said, we need to be “fearful when others are greedy, and greedy when others are fearful.”

This is a time to be greedy. Buying the panic has always worked, it’s just a question of timing. If we go too soon or too big, then the further drop can cause some more pain, but that is just part of trading. Nobody gets to pick the bottom.

Buy in, and wait.

Our traders manage the leverage and won’t ever have positions on that can’t be maintained. That is what makes them professionals.

A week in the market can be a long time. Hopefully next weekend we’ll be discussing why the banking crises was blown way out of proportion. If not next weekend, then maybe the one after.

After profiting on the initial sell off, most traders have been buying into the market retracement looking for value. In the 'mid term' we expect this will make sense, and will compound the gains made on the initial drop. However, when panic is in the market place, calling the bottom is often like trying to catch a falling knife. Hopefully, it's not far away, and if it isn't- we'll be very well positioned to take advantage.

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