Updated: Mar 24
March 17, 2023 | Premium Service | In the first quarter of 2019, Credit Suisse (CS) was trading north of $17, but earlier this week was below $2 in choppy markets. The credit default swaps (CDS) were trading north of 3,300 basis points over swaps on Wednesday, implying a “D” bond equivalent rating for the bank. JPMorgan (JPM) wrote a note this week saying that CS is likely to be acquired by UBS AG (UBS).
Maximum Number of Basis Points
AAA: 1 bp
AA: 4 bp
A: 12 bp
BBB: 50 bp
BB: 300 bp
B: 1,100 bp
CCC: 2,800 bp
Default: 10,000 bp
Earlier this week, the Swiss National Bank provided emergency funding to CS, allowing the bank to initiate a pre-emptive tender offer for its debt. We have been a buyer of the stock below $2 and as discussed below, are inclined to add to the speculative position opportunistically.
Several readers have asked about various banks. We direct your attention to the most underutilized public resource on US banks, namely the National Information Center maintained by the Federal Reserve Board and the other members of the Federal Financial Institution Examination Council (FFIEC). NIC, as we affectionally refer to her, provides detailed performance reports on large bank holding companies down to $10 billion in assets.
One bank that comes up a lot in reader emails in Bank of America (BAC). The major question is how BAC compares to other banks such as JPMorgan (JPM). We published the most recent for JPM earlier (“Who Killed Silicon Valley Bank?; The IRA Bank Book Q1 2023.” We also thank our readers for comments and corrections on this analysis. Suffice to say that the presentation for GAAP filers and the regulatory data provided on NIC are very different. Below we show the mark-to market (M2M) for BAC.
Source: FFIEC/WGA LLC
Notice that BAC held $539 billion in MBS and another $270 billion in Treasury debt at the end of 2022. If we do the same analysis as JPM, BAC ends up worse in terms of negative M2M on capital because of the large MBS position. At 17% of total assets, BAC MBS position is in the 73rd percentile of Peer Group 1, vs the average for the 131 banks in the peer group of 12.5% of total assets. The good news is that as interest rates fall, the M2M deficit for banks also falls.
Update on Credit Suisse & Guild Mortgage
We first took a position in CS earlier in the year on the presumption that neither the US government not the Swiss National Bank would not allow the bank to fail. Our thesis turned out to be right, but the stock remains under intense selling pressure, in part because management has been unable to complete the restructuring of the US business.
The sale of the structured finance group to Apollo (APO) portfolio company Atlas Securitized Producsts has been a bit of a fiasco, in large part because the buyout firm was not willing to acquire the $20 billion in Ginnie Mae assets and servicing operation, Select Portfolio Servicing (SPS). Readers of The IRA will recall that last September, SPS entered into a definitive asset purchase agreement with Rushmore Loan Management Services LLC to acquire certain Rushmore assets. The deal was never completed, however, leading us to conclude that US regulators had informally said no to the transaction.