At the risk of this becoming a weekly occurrence, by now you’ve likely heard of Credit Suisse being sold to UBS, and probably have some questions about how this impacts your portfolio. I’ve laid out some of the key points below, but perhaps most importantly to highlight that Morningstar, our key investment management partner, has no meaningful exposure to Credit Suisse in its portfolios.
The background:
Credit Suisse had long been a major player in financial markets across their investment bank, wealth management, asset management and Swiss banking units. In recent years, they have had a significant fall from grace, culminating this past week in being purchased by their long-term rival UBS for next to nothing. The deal was effectively forced on them by the Swiss authorities to stop the likelihood of a banking crisis after a series of fast-escalating events, including:
- Indicating they had “material weakness” in their financial reporting and frameworks
- The major shareholder would not provide additional capital to the business
- Credit Suisse said it would borrow up to 50 billion from the Swiss bank.
The latter provided short-term relief before the transaction with UBS was announced over the weekend. It’s worth noting that while the business changed hands very quickly, Credit Suisse has been a business plagued with issues in recent years. There have been continual changes in management, tax evasion fines, a struggling investment banking franchise, and corporate espionage. These factors combined have meant significant weakness in the share price, and have overshadowed the value in the wealth management, asset management and Swiss banking units.
Below, I’ve included a note from our investment manager, Morningstar Investment Management, explaining their portfolio positioning and how it’s set up to serve you in the long term.
Morningstar Investment Management has no material exposure (maximum exposure is 0.01%) to Credit Suisse in the investments it manages on behalf of investors across Europe.
Though the sale to UBS is not necessarily a positive outcome for Credit Suisse, it’s been an exercise in the importance of diversified holdings – one of Morningstar Investment Management’s core investment principles. The portfolios they build for investors have exposure to a wide range of investments, asset classes and themes, so that when things like this do happen, it doesn’t derail investors’ chances of meeting their financial goals over the long term.
Could this spread to other banks?
For the majority of investors, this is the biggest question. We’d argue that while the rapid rise in interest rates has caused some short-term losses for the banking industry that are meaningful, industry capital levels are better positioned to weather the storm.
Though it was materially different than the current bank runs with regional banks, the Global Financial Crisis in 2008 demonstrated how the fragility of banks can impact the broader economy and asset prices around the globe. With this episode uppermost in people’s minds, it is somewhat understandable that market participants react strongly to any perceived weakness in the banking sector. However, the strength of this reaction is not always a good guide to the seriousness of the situation.
How is the investment team at Morningstar reacting to this news?
As ever, we are prioritising research over reaction. We are very fortunate that Morningstar have specialist banking analysts within our company, together with members of the investment team that focus on valuing banks across the globe.
As your advisers, we are here to support you in your financial journey. If you’d like to discuss these events, or how they fit in the context of your long-term financial plan, please do reach out – we’d be delighted to talk.
Best,
John Sangster,
Head of Investments
Important Information
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