Given their uncertain future amid an unraveling banking crisis and macroeconomic headwinds, it could be wise to avoid troubled financial stocks Credit Suisse Group AG (CS), First Republic Bank (FRC), and Silvergate Capital Corporation (SI) until their prospects become clearer.
The casualties (so far) of the recent banking crisis, which has rocked economies on both sides of the Atlantic and around the world, suggest a recurring pattern.
The institutions were flooded with abundant deposits from individuals and businesses flush with easy money gushing in from the government’s stimulus checks and low-interest loans. To put all this money to work, the banks parked it in long-term government debt, “safe” from credit risk.
However, inflation remained high, and the Federal Reserve and other major central banks reversed their accommodative monetary stance and started tightening their belts by increasing interest rates.
This caught a few financial institutions wrong-footed and exposed them to interest-rate risks. The debt instruments, issued in a low-interest rate environment and held in their balance sheets, suffered significant devaluations. As a result, these banks were sitting on paper losses. There would have been no material consequence if these instruments could be held till maturity.
However, the rising interest rates also came with higher-order effects. The narrow base of depositors on which these banks depended also needed to dip into their savings as their economic prospects began to feel the heat of rising borrowing costs and overall macroeconomic sluggishness.
Under pressure to honor the increasing volume of withdrawals, the banks had to sell their assets, converting their paper losses into real ones. Word got out, and uncertainty and groupthink fed off each other to turn fears of insolvency of these vulnerable institutions into self-fulfilling prophecies.
With their fate up in the air, investors seem to be flocking to these casualties to pick up the pieces and benefit from the residual value or unexpected reversal of fortunes. However, with further increases in borrowing costs set to deflate asset prices, the ongoing crisis could deepen further.
In the above context, let us look closely at the featured stocks.
Credit Suisse Group AG (CS)
CS is a financial services company based in Zurich, Switzerland. The company’s segments include Swiss Universal Bank, International Wealth Management, Asia Pacific, Global Markets, Investment Banking & Capital Markets, Strategic Resolution Unit, and Corporate Center.
In the wake of the collapse of the Silicon Valley Bank and Signature Bank (SBNY), on March 15, CS announced that it would borrow up to ₣50 billion ($54.34 billion) from the Swiss National Bank (SNBN) to address liquidity concerns.
However, as individuals and businesses remained dissuaded from keeping their faith in the bank’s prospects, the lifeline wasn’t enough to stem the outflow of deposits and selloff in its shares. CS was acquired by its long-time rival UBS Group AG (UBS) in a deal engineered by Swiss and global authorities on March 19.
As a part of this deal, UBS agreed to pay CS shareholders ₣3 billion ($3.27 billion, almost equal to its current market capitalization) in the all-share deal. The Swiss government also agreed to backstop ₣9 billion ($9.81 billion) of potential losses from CS’ assets and allowed UBS to wipe out about $17 billion of Credit Suisse bonds.
On March 27, Ammar al-Khudairy, the chairman of Saudi National Bank (CS’ largest shareholder), resigned for personal reasons. This came less than two weeks told Bloomberg TV that his bank would “absolutely not” be willing to assist if CS needed more capital, sending the bank’s shares to record lows.
Although it was later clarified that his comment was based on the intention of avoiding regulatory and compliance issues of ownership going beyond 10%, it was enough to set off a chain of events that ultimately led to CS’ acquisition by UBS.
For the fiscal year 2022, CS’ net income from business activities decreased by 7.4% year-over-year to ₣4.46 billion ($4.86 billion), while its customer deposits decreased by 27.6% year-over-year to ₣135.05 billion ($147.24 billion). As a result, the bank’s net profit declined 6.5% year-over-year to ₣1.19 billion ($1.30 billion).
CS’ total assets stood at ₣215.41 billion ($234.85 billion) at the end of the fiscal year 2022, compared to ₣253.37($276.24 billion) at the end of the fiscal year 2021.
CS’ revenue for the fiscal year 2023 is expected to decline 1.4% year-over-year to $15.95 billion, while it is expected to report a loss of $0.60 per share during the same period. As a result of its acquisition, CS’ fate is closely linked to UBS over the longer term.
Despite CS’ average 10-day volume of 171.04 million being significantly above its average 3-month volume of 47.34 million, as a result of the turmoil, the stock has plummeted 72% over the past month to close the last trading session at $0.86.
CS’ POWR Ratings are consistent with its uncertain prospects. The stock has a D grade for Stability and Sentiment. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
CS is ranked #85 of 92 stocks in the Foreign Banks category. Click here to access additional ratings for CS’ Growth, Value, Momentum, and Quality.
First Republic Bank (FRC)
FRC is a commercial bank and trust company that offers private banking, private business banking, real estate lending, and wealth management services in selected metropolitan areas in the United States. The bank operates through two segments: Commercial Banking and Wealth Management.
The failure of SVB also spilled over to FRC towards the middle of this month. It came under scrutiny as it had about two-thirds of its deposits in uninsured accounts, which had increased the risk of the flight of deposits as a result of the contagion. On March 15, S&P Global Ratings also downgraded FRC’s credit rating to junk status, citing similar reasons.
Although the March 16 announcement by Federal Regulators that 11 banks have given FRC their vote of confidence by depositing $30 billion in the bank was soon followed by news that JPMorgan Chase & Co. (JPM) CEO Jamie Dimon has been leading discussions with chiefs of other big banks about a new effort to stabilize FRC, it has not prevented the bank’s stock price from tanking.
FRC’s decision to suspend its dividends, top executives selling millions of dollars of company stock in the two months before the bank’s shares plummeted, and the bank paying millions of dollars to family members of its founder James Herbert for work done in recent years has not helped shore up investor and depositor confidence either.
For the fourth quarter of the fiscal year that ended December 31, 2022, although FRC’s total interest and non-interest incomes increased 45.6% and 6.5% year-over-year to $1.70 billion and $263 million, respectively, its total interest and non-interest expenses increased 1017% and 6.1% year-over-year to $525 million and $919 million, respectively.
As a result, FRC’s quarterly net income available to common shareholders decreased 6% and 6.9% year-over-year to $346 million and $1.88 per share.
FRC’s revenue and EPS for the fiscal year 2023 are expected to decline 40.4% and 89% year-over-year to $3.50 billion and $0.90 per share, respectively. However, concerns regarding these bearish estimates are dwarfed by question marks regarding FRC’s future as a stand-alone bank.
Despite FRC’s average 10-day volume of 138.8 million being significantly above its average 3-month volume of 27.68 million, the stock has plunged 88.7% over the past month to close the last trading session at $13.82.
Given its precarious situation, FRC has an overall rating of D, which translates to a Sell, in our POWR Ratings system. It has an F grade for Sentiment and a D for Stability and Quality.
Unsurprisingly, FRC is ranked last of 10 stocks in the F-rated Money Center Banks category.
Click here for additional ratings for Growth, Value, and Momentum of FRC.
Silvergate Capital Corporation (SI)
SI is the holding company for Silvergate Bank, which provides financial infrastructure solutions and services for the digital currency industry through its platform: Silvergate Exchange Network. Other offerings include commercial banking, commercial and residential real estate lending, mortgage warehouse lending, commercial business lending, and deposit products and services.
On January 5, it was disclosed that, in the wake of the collapse and insolvency of Sam Bankman Fried-led cryptocurrency exchange FTX, the consequent run on SI’s bank, which amounted to about $8.1 billion in withdrawals, forced it to sell assets at a steep loss of $718 million that significantly exceeds the bank’s total profit.
On March 1, SI said in a regulatory filing that it couldn't file audited financial statements to regulators on time. More importantly, it added that the recent events in the crypto ecosystem leave it at the risk of being "less than well-capitalized" and that it is evaluating the effect those events have on its ability to continue as a going concern. This resulted in a whole host of crypto-focused companies cutting ties with SI.
The above chain of events culminated with the March 8 announcement by SI that it would wind down Silvergate Bank and return all deposits. It added that it “is also considering how best to resolve claims and preserve the residual value of its assets.”
On March 20, SI disclosed that it had received a non-compliance notice from NYSE because of its delayed 10-K filing. While the company claimed that it has been working diligently to complete the required information, and a substantial part of such information has been completed, it and its independent registered public accounting firm need additional time to complete the procedures.
For the fourth quarter of the previous fiscal year, which ended December 31, 2022, although SI’s total interest income increased 196.6% year-over-year to $114.12 million, its total interest expense increased exponentially to $60.43 million from $276 thousand during the previous-year quarter.
Moreover, SI’s adjusted non-interest income for the quarter declined 34.5% year-over-year to $7.24 million, while its adjusted non-interest expense increased 50.3% year-over-year to $38.57 million. As a result, the company’s adjusted net income available to common shareholders declined 17.7% and 27.3% year-over-year to $15.12 million or $0.48 per share, respectively.
With the winding down of SI’s banking business, the company’s EPS for the fiscal year 2023 is expected to decline 95.8% year-over-year to $0.16. Despite SI’s average 10-day volume of 35.41 million being significantly above its average 3-month volume of 19.19 million, the stock has lost 87% and 97.4% of its value over the past month and past six months to close the last trading session at $1.97.
SI’s bleak outlook is reflected in its POWR Ratings. It has an overall F rating, equating to a Strong Sell in our proprietary rating system. It also has an F grade for Growth and Sentiment and a D for Stability and Quality.
Unsurprisingly, it is ranked last of 43 stocks in the D-rated Pacific Regional Banks category.
Click here to see the additional ratings of SI’s Value and Momentum.
Consider This Before Placing Your Next Trade…
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CS shares were trading at $0.85 per share on Tuesday afternoon, down $0.01 (-1.70%). Year-to-date, CS has declined -72.04%, versus a 3.60% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.
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