Highlights

Crisis averted, or the start of a slow meltdown? While many questions remain over the collapse of Silicon Valley Bank, shares boomed yesterday in a sign Wall Street has moved past the “panic” stage of the banking saga. Regional banks like First Republic, whose shares got punished on Monday, rebounded as the threat of an SVB-like bank run dissipated.

That said, Credit Suisse, which has seen a fair few scandals in recent years leading to an increase in depositor withdrawals over that period, hit a new low overnight with shares at their lowest point ever. This comes amid growing concerns over their balance sheet with the ominous announcement from Saudi National Bank (9.9% owner of CS) ruling out more funding.

BlackRock boss Larry Fink, manager of the largest funds in the world, noted in his letter to investors that SVB collapse may be the start of a ‘slow rolling crisis’.  

While the U.S. labor market remains strong, layoffs have spiked in 2023. Companies announced 180,713 job cuts in January and February—the most to start any year since 2009, according to Challenger, Gray & Christmas. About one-third of the layoffs took place at tech companies.

What's Happening At Credit Suisse?

Shares in the Swiss lender plunged more than 30% at one point on Wednesday (UK time) to a record low of about 1.56 Swiss francs a share, after its top shareholder, the Saudi National Bank (SNB), ruled out providing it with fresh funding because of regulations that cap its stake – now 9.9% – at 10%.

SNB’s chairman, Ammar Al Khudairy, told Reuters that Credit Suisse was “a very strong bank” and was unlikely to need more cash after raising 4bn Swiss francs (£3.59bn) to fund a major restructuring plan in autumn last year. However, his funding cap comments spooked investors, who feared it could limit emergency cash from investors in the Middle East.

SNB subsequently announced it would provide Credit Suisse with liquidity if needed. This was after Credit Suisse warned of ‘material weaknesses' in financial reporting.

That compounded panic about potential weaknesses across a global banking sector still reeling from SVB’s collapse, further fuelled by fears over continuing problems at the Swiss lender, which as Europe’s 17th largest lender by assets is far larger than SVB and deemed systemically important to the global financial system.

After the chaos of 2008, regulators around the world introduced tighter restrictions – particularly for banks deemed to be important to the global financial system. Most central banks and national regulators have introduced annual stress testing to check whether banks can withstand severe economic shocks and market turmoil, while still supporting their customers.

In the worst-case scenario, systemically important banks are meant to have enough capital, and so-called “living wills” in place, to ensure they can fail in a relatively orderly way. However, these living wills have yet to be tested by a real-life banking failure.

Credit Suisse might be unique as customers – primarily wealthy clients and businesses rather than everyday savers – have been pulling money from the bank for months, leading to more than 111bn Swiss francs of outflows late last year. Plus the bank is in the process of a major restructuring plan, meant to stem major losses, which ballooned to 7.3bn Swiss francs in 2022, and revive operations hampered by multiple scandals over the past decade involving alleged misconduct, sanctions busting, money laundering and tax evasion.

What Happened At Signature Bank?

We’ve commented at length about the collapse of Silicon Valley Bank, the second-largest banking collapse in U.S.history. But do you know the details of how the third-biggest bank failure happened just two days after SVB imploded?

On Sunday, regulators seized the assets of NY-based Signature Bank and gave senior management the push, but they assured its depositors that they could access all of their money. Signature was deemed a threat to the U.S.financial system after panicked customers reportedly withdrew 20% of its total deposits.

But leaders inside the bank say authorities overreacted, led by none other than Barney Frank, the former U.S. representative on Signature’s board. If that name sounds familiar, it’s because Frank crafted key banking regulations in the aftermath of the 2008 financial crisis - the Dodd-Frank Act.

Frank argues that Signature was singled out because of its ties to crypto—it was one of the go-to banks for crypto companies. Frank told Bloomberg that he believes Signature wasn’t on the verge of collapse, and regulators only shut it down “to send a message to get people away from crypto.”

What's Going On At Meta?

In a week where they shut down NFT services, Meta also announced a second massive round of layoffs. Meta’s “year of efficiency” seems to mean fewer employees.

Yesterday, CEO Mark Zuckerberg said Meta plans to lay off 10,000 employees, just four months after it laid off 11,000 staff members. That round of layoffs, impacting 13% of Meta’s workforce, represented the biggest job cuts in the company’s history.

Not only is Meta laying off 10k employees, but it’s also closing 5,000 open roles. This is not a company that wants to onboard many people right now.

Meta is looking to reduce costs as part of what Mark Zuckerberg calls the “year of efficiency.” Last year was “a humbling wake-up call,” Zuck said, citing economic uncertainty and increased competition (aka TikTok and a plethora of other youth orientate platforms we’ve never heard of) for denting the company’s ad revenue.

But Meta made plenty of unforced errors, too. And by dubbing 2023 “the year of efficiency,” it’s acknowledging that previously, things were not very efficient.

Putting the recent layoffs in context, even after shedding 21,000 jobs, Meta will still have a higher headcount than it did before the pandemic. In the boom times of 2020 and 2021, it hired more than 27,000 employees.

Douugh, Did You Know?

Stock buybacks by companies in the S&P 500 are projected to top $1 trillion in 2023. Some of the biggest announcements have been Chevron’s $CVX $75bn buyback program, Meta's $META $40bn plan & Goldman Sachs’s $GS $30bn program. But what is a buyback & why are they important?

What’s a buyback program?

A share buyback is when a company uses its own money to buy back some of its outstanding shares from investors. The number of shares in circulation falls, but shareholders’ stake in the company & the amount they're due from dividends increases.

What are the benefits?

The company’s value remains the same but the supply of shares is lower, the share price will, in general, tend to increase. EPS increases due to a reduction in outstanding shares. Shareholders will have a greater share in the company’s profits.

How do they work?

Say a company has 10m shares outstanding & the per-share price is $50. If the company decides to buy back 1m shares, it would cost them $50m. This would reduce the number of outstanding shares to 9m & increase the ownership % of the remaining shareholders.

Risks

It's important to understand that a buyback program can affect the stock price & may increase the value of the remaining shares. However, it's important to consider the company's financial health, growth prospects, and industry trends before making investment decisions.

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