Credit Suisse: UBS emergency rescue ‘was driven by banking regulators,’ strategist says
RBC Capital Markets Managing Director Gerard Cassidy joins Yahoo Finance Live to discuss UBS’s $3 billion Credit Suisse acquisition, ripple effects, First Republic, and the outlook for U.S. banking.
BRAD SMITH: Well, UBS's takeover of Credit Suisse was supposed to calm fears of a banking contagion, but anxiety is spreading across the industry. Data shows that bank deposits for both small and large banks are on the decline. And joining us now, we have Gerard Cassidy, RBC Capital Markets Managing Director.
And, Gerard, one thing that I wrote down in my notes is this is an acquisition by any other name as proven through the UBS's chairman's own statement within this that "this acquisition is attractive for UBS shareholders but, let us be clear, as far as Credit Suisse is concerned, this is just an emergency rescue." Give us your perspective on the matter.
GERARD CASSIDY: I think you summed it up very well. This was a transaction that was driven by the banking regulators and the Swiss National Bank over in Switzerland. Clearly, Credit Suisse had serious problems, as you might recall, 6 to 12 months ago.
This has been an embattled company for a number of years due to some poor management decisions. And it all came to a head over the weekend as the deposit outflows accelerated for Credit Suisse last week. UBS was there, with the help of the Swiss National Bank, to put together a deal that over time will benefit UBS's shareholders very nicely.
JULIE HYMAN: Gerard, I'm trying to figure out and piece out what is happening this morning. And thank you for joining us, by the way, because you're a great person to help us figure out what's happening here. I guess what I'm trying to figure out is are there now still concerns of more of a ripple effect, that there will be bag holders, so to speak, on the other side of Credit Suisse assets-- and let's leave AT1 aside for a moment-- that will now cause other things to fail, to have write-downs at other banks, et cetera? Or-- and/or is it that there's widespread concern about higher funding costs and capital costs for banks across the spectrum?
GERARD CASSIDY: I think it's more the latter than the former because, as I mentioned, the Credit Suisse issues really started to be quite severe six to nine months ago. And so counterparty trades and other types of activity with Credit Suisse, you know, guardrails were put in place, not that anybody was expecting what was going to happen this past weekend to happen. But clearly, there was guardrails put in their controls and procedures.
There will be some higher costs to banks, particularly the banks that rely on these bail-in bonds that you referenced. Those are the European banks. The American banks do not use that in their capital structure. So certainly, banks that do use that will certainly need to see higher costs due to the fact that those bail-in bonds were effectively wiped out to zero.
BRAD SMITH: Are bank clients in better or worse position when you do have consolidation like this taking place and at type of fire-price prices?
GERARD CASSIDY: It's an interesting question because what you're likely to see is that they're-- the larger the bank arguably should be more stable. It's more important, obviously, to the economies in which they operate, in this case Switzerland for the case of UBS. But the question is, what level of customer service will a client receive? Will it be as good as what it was before?
I know here in the United States, in particular, one of the real advantages going to a regional or community bank is the much higher level of personal service the customer receives versus going to one of our very large universal banks that offer great service, but it just doesn't have that personal touch that you get from a community bank or a small regional bank.
JULIE HYMAN: Gerard, FINMA, which is the Swiss financial regulator, had a quote that I thought was really interesting. It said that Credit Suisse experienced a crisis of confidence and, quote, "there was a risk of the bank becoming illiquid even if it remained solvent." That is, even if the balance sheet was OK, even if its tier 1 capital ratio was OK, which it was, seemingly, if the market doesn't believe it, then it might as well not be true. Is what happened over the weekend? Has that ended the crisis of confidence broadly for the banking system for financial stability globally?
GERARD CASSIDY: I think it's take a huge step forward to improving it, absolutely. This is a very big deal. This was the weakest global financial company on the spectrum. So this moves us much closer to more financial stability. You never say never.
But clearly, this is the step in the right direction. And I think as each day and each week goes by and the stability improves, it will show that this was the right move by the Swiss National Bank, but also the global central banks, whether it was the Federal Reserve, the ECB giving support to what the Swiss were doing, that certainly is a real positive.
JULIE HYMAN: Even with this emergency rescue, is it ever expected, at least from UBS's perspective, that Credit Suisse will be a profitable asset within their business?
GERARD CASSIDY: It should be because the cost savings one can generate from combining two companies that have such overlap arguably should be very profitable to the acquirer. Now, it will take time. They've been very clear it will take time. They have different rules and regulations over in Switzerland than we do here in the US in terms of downsizing.
But one of the reasons why, in fact, you look at the New York Community Bank deal acquiring Signature Bank over the weekend from the federal FDIC is going to be very profitable to New York Community. And part of it has to do with the cost savings you achieve. But also, you write-down the assets coming into the transaction, and you're getting them at fire-sale prices. And as things stabilize, these types of transactions, over time, can be very profitable to the acquirer and their shareholders.
JULIE HYMAN: So since you mentioned New York Community Bank, which, of course, the shares have been going up on that deal, as you mentioned, I do want to move to First Republic and to the domestic regional banks because First Republic shares are down in premarket trading. That's after Standard & Poor's Global cut the regional banks credit rating yet again over the weekend. What do you make of that, Gerard? What is going to be the future for First Republic at this point?
GERARD CASSIDY: I think it's easy for us to say, or any investor, that the future for First Republic will be entirely different than what it was before the Silicon Valley debacle that started two Wednesdays ago. And the ultimate outcome for First Republic is difficult to say right now. But clearly, they have the lines in place to handle any deposit flight. But as we know, borrowing off those lines is expensive. And that certainly hurts their margins, hurts their profitability.
So if they can get through the deposit flight, which we think they can because of the deposits by those large American banks, as you're aware of, the $30 billion last week, but on top of that, they have access to Federal Home Loan Bank advances as well as the discount window, so if they could stay through the deposit flight, then they have to reassess how profitable they can be with the model that they had created, which will certainly have to change on a go-forward basis.
BRAD SMITH: For the regional bank turmoil that has ensued, how does that overflow even into the real estate market from what you're going to be tracking?
GERARD CASSIDY: It's interesting because there is certainly concerns about the commercial real estate markets around the country, particularly the office markets in our big urban cities like New York or Boston, Los Angeles, San Francisco, even Chicago in the Midwest because the work-from-home types of opportunities continue to persist and probably will stay in place for quite a long time that these buildings are not completely occupied.
So I think what you're going to find is, over time as the leases come up-- this is not a 1990 period when a number of brand new constructed buildings came on the market and, at the same time, couldn't find tenants and there was a massive problem in commercial real estate. We don't see it that way. We see a long grind down. As the leases come up for renewal, many of the Class-A tenants may take less space because they don't need as much, so that will be certainly a challenge.
And then as properties come up for refinancing their five-year or seven-year term loans, they now have to refinance it. The capitalization rates are going to be higher today than when the loans were made. So there will be some challenges there as well. But we don't foresee it as being cataclysmic like it was in 1990. But it will be a challenge going forward.
JULIE HYMAN: And, Gerard, sorry, just to circle back to one second for First Republic. So the parallels-- and that quote I mentioned before, the difference between solvency and liquidity, that seems to be at the core of what's going on at First Republic now. As you say, even if the deposit losses have now stabilized, the market does not seem to have faith in First Republic. Is the difference then between a Credit Suisse situation and a First Republic situation what you were discussing in terms of the Federal Reserve funding that is available to First Republic?
GERARD CASSIDY: That is one of the significant differences, you're absolutely right. But also, when you look at the model, one of the reasons the stock has not do-- obviously, it's down at the-- or expected to be down at the opening is that the business model that they relied on, which was high-net-worth deposits and very low costs on the liability side of the balance sheet, and on the asset side of the balance sheet was a large portion of single-family jumbo mortgages at low fixed rates, so that kind of strategy in the current rate environment is not very profitable considering now the cost of funding has gone up so much.
So I think the market's reflecting that, even assuming they get through this period and they survive, that the actual profitability of the company is going to be greatly reduced because of the cost of funding having going up so much. So I think that's part of the reason the stock is down, in addition to, of course, the uncertainty of the deposit flight and the impact that may have on the actual longevity of the company.
JULIE HYMAN: Gerard, really helpful stuff here this morning. Thanks so much. Gerard Cassidy, RBC Capital Markets managing director. Thanks.