The End of a Major Swiss bank
As one of the top 30 globally systemically important banks, Credit Suisse fulfills the condition of a whale in the banking market. “When a whale floats belly-up to the surface, bear markets and crisis often reach their absolute pessimism low,” says an old stock market adage. But let us take things one step at a time.
First, California's Silicon Valley bank SVB was shut down by the U.S. regulator a week ago Friday. Before the bank run, it was number 16 in the American banking industry. This made SVB the largest bank failure since Washington Mutual in 2008. Despite protection of the deposits, uncertainty remained in the markets. Bank stocks around the world recorded sharp price losses. Swiss Credit Suisse CS was particularly under fire.
Events came to a head last weekend, and competitor UBS is now taking over the troubled institution. Before that, however, UBS had to be invited by the Swiss Federal Council with guaranteed commitments. We were not invested in CS stock. In the Gutmann Global Bond strategy, we hold (on a look-through basis) 0.3% in a covered bond of the Swiss banking institution. Just under 0.2% is invested in two short-dated bonds (2023/2024). These bonds were already well protected even before the takeover by UBS.
Gutmann focuses on quality
Each bank has different custodians and correspondent banks. Credit Suisse is not one of them for Bank Gutmann.
In such an environment of uncertainty, share prices fall and the safest securities are in high demand. The classic is the German government bond. But other bonds with high credit ratings, such as covered bonds and good quality corporate bonds, are also in high demand. The first emotional reaction is to flee, i.e. to sell shares.
Gutmann is overweight equities in the portfolio management mandates. For most of our clients, this means an equity quota of 5 percentage points above the strategically selected equity component. For example, if someone has strategically selected 60% equities, this means 65%. We continue to maintain this overweight position. The markets have already reacted to the events. As soon as things calm down, we expect the equity markets to be strong. An important reason for this is the lower expectation of future interest rate hikes, coupled with high supply of liquidity to the markets by the central banks. However, we remain flexible and always reserve the right to change our opinion.
Even more relevant is our positioning in bonds. Gutmann has always attached importance to high security and quality in the bond portfolio. In recent months, we extended maturities and further reduced the already low credit risk by buying more covered bonds in the financial sector. In the wake of the SVB bust, we expected inflation expectations to decline and therefore reduced the share of inflation-linked bonds in the Gutmann Global Bonds strategy from 10% to 7% last week. In mid-2022, we still had 14% in inflation-linked securities. This reduction is currently also having a positive impact.
A secure business model
The trust of our customers is the highest asset at Gutmann. Our business model is therefore geared to security. In concrete terms, this means that we invest customer deposits in line with matching currencies and maturities and by not taking any off-balance sheet market risks. We ensure the highest creditworthiness and liquidity in our own investments. Our lending business is small in scale and essentially collateralized by borrowers’ securities deposited with us. Eligible capital consists exclusively of common equity tier 1 capital and is a multiple of the amounts required by law.
But one factor stands above all considerations of the figures: Gutmann's risk culture. As an owner- and partner-managed bank, we are particularly risk-averse. This has been the case for many decades and allows our clients to sleep well even in uncertain times.
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