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2023’s banking crisis claims Credit Suisse - Industry roundup: 20 March

2023’s banking crisis claims Credit Suisse

Just days after receiving a state bailout, Credit Suisse is to be acquired by UBS, following the intervention of the Swiss Federal Department of Finance, the Swiss National Bank and the Swiss Financial Market Supervisory Authority (FINMA). The combination is expected to create a business with more than US$5 trillion in total invested assets and sustainable value opportunities, with more than US$1.5 trillion invested assets.

“This acquisition is attractive for UBS shareholders but, let us be clear, as far as Credit Suisse is concerned, this is an emergency rescue,” commented UBS Chairman Colm Kelleher. “We have structured a transaction which will preserve the value left in the business while limiting our downside exposure. Acquiring Credit Suisse’s capabilities in wealth, asset management and Swiss universal banking will augment UBS’s strategy of growing its capital-light businesses. The transaction will bring benefits to clients and create long-term sustainable value for our investors.”

The transactions’ discussions were initiated jointly by the Swiss Federal Department of Finance, FINMA and the Swiss National Bank, and the acquisition has their full support. Under the terms of the all-share transaction, Credit Suisse shareholders will receive 1 UBS share for every 22.48 Credit Suisse shares held, equivalent to CHF 0.76/share for a total consideration of CHF3bn. UBS benefits from CHF25bn of downside protection from the transaction to support marks, purchase price adjustments and restructuring costs, and additional 50% downside protection on non-core assets. Both banks have unrestricted access to the Swiss National Bank (SNB) existing facilities, through which they can obtain liquidity from the SNB per the guidelines on monetary policy instruments.

The combination of the two businesses is expected to generate an annual run-rate of cost reductions of more than US$8bn by 2027. UBS Investment Bank will reinforce its global competitive position with institutional, corporate and wealth management clients by accelerating strategic goals in Global Banking while managing down the rest of Credit Suisse’s Investment Bank. The combined investment banking businesses accounts for approximately 25% of Group risk weighted assets. UBS anticipates that the transaction will be EPS accretive by 2027, and the bank remains capitalised well above its target of 13%. Colm Kelleher will be Chairman and Ralph Hamers will be Group CEO of the combined entity.

Due to the emergency ordinance issued by the Swiss Federal Council, the transaction is not subject to shareholder approval. UBS has obtained pre-agreement from FINMA, Swiss National Bank, Swiss Federal Department of Finance and other core regulators on the timely approval of the transaction.

“Given recent extraordinary and unprecedented circumstances, the announced merger represents the best available outcome,” reflected Axel P. Lehmann, Chairman of the Board of Directors of Credit Suisse. “This has been an extremely challenging time for Credit Suisse and while the team has worked tirelessly to address many significant legacy issues and execute on its new strategy, we are forced to reach a solution today that provides a durable outcome.”


Stress among small banks is likely to slow the US economy

As stress ripples through smaller banks in the US, the tightening in lending standards among those institutions is expected to reduce economic growth this year, according to Goldman Sachs Research.

While the macroeconomic impact of a pullback in lending is highly uncertain until the extent of the stress on the banking system becomes apparent, economists in Goldman Sachs Research lowered their forecast for US fourth-quarter GDP growth (year-over-year) by 0.3% to 1.2%. The new estimate incorporates expectations for tighter lending and reflects, in part, a larger downgrade to investment spending.

Small- and medium-sized banks play an essential role in the American economy. Lenders with less than US$250bn in assets account for roughly 50% of US commercial and industrial lending, 60% of residential real estate lending, 80% of commercial real estate lending and 45% of consumer lending, according to a report by Goldman Sachs economists Manuel Abecasis and David Mericle. To the extent that banking stress that started with the resolution of Silicon Valley Bank has an impact on lending, it is likely to be concentrated in a subset of small- and medium-sized banks.

While the two banks taken into receivership account for just 1% of total bank lending, the lending shares are 20% for banks with a high loan-to-deposit ratio, 7% for banks with a low share of FDIC-insured deposits and 4% for banks with a low retail share of deposits.

Goldman Sachs economists expect lending standards will tighten more, to a degree that’s greater than during the dot-com crisis but less than during the financial crisis or the height of the pandemic. “Bank lending standards had already tightened significantly over the last few quarters to levels previously unseen outside of recessions, presumably because many bank risk divisions shared the recession fears that have been widespread in financial markets,” they wrote. “This is important because it means that lending standards started at a tight rather than a normal level, and as a result the incremental impact of a further tightening brought on by recent small bank stress might be more limited than it seems at first.”

When assessing the economic impact of tighter lending standards, the economists assumed that small banks with a low share of FDIC-covered deposits reduce new lending by 40% and other small banks reduce new lending by 15%. This implies a 2.5% drag on the total stock of bank lending, which economics studies suggest would result in a roughly 0.25% drag on 2023 GDP growth. The statistical approach expands Goldman Sachs Research’s financial conditions growth impulse model to include bank lending standards, which they assume will tighten substantially further. This implies a drag on GDP growth of 0.5% beyond that already suggested by the lagged impact of the tightening in recent quarters.

For monetary policymakers at the Federal Reserve - unless bank stress significantly changes the outlook - their goal for the year will be to keep demand growth below potential to keep the rebalancing of supply and demand on track. Tighter bank lending standards help to limit demand growth, sharing the burden with monetary policy tightening. The analysis from Goldman Sachs Research implies that the incremental tightening in lending standards that they expect from small bank stress would have the same impact on growth as roughly 25-50 basis points of rate hikes would have via their impact on market-based financial conditions.

As such, Goldman Sachs economists have pencilled in a pause in Fed hikes for the monetary policy meeting on 21-22 March. They have otherwise left their Fed forecast unchanged and now expect a peak funds rate of 5.25-5.5% but note sharply increased uncertainty around the Fed path from here.


Absa CIB eyes Contour trade finance network

Digital trade finance network Contour has announced that pan-African bank Absa Corporate and Investment Bank (CIB) are intent on joining the network and are finalising negotiations.

Absa CIB clients will be able to adopt a fully digital end-to-end letter of credit (LC) settlement process. Presenting digital LC documents can be done from an average of five to 10 days to under 24 hours. Contour says that, currently, many of the continent’s trade transactions are manual and paper-based, which slows down trade growth by creating another layer of complexity and costs.

With a presence in 15 countries from Botswana to Zambia, Absa CIB is banking on innovation to drive sustainable growth. Digital developments can reduce barriers to accessing trade finance and, collectively, fintechs and financial institutions can work together to help trade and trade finance grow sustainably.

The African Continental Free Trade Area (AfCFTA) is a flagship project that aims to boost intra-Africa trade by 52.3% and expand the size of the continent’s economy to US$29 trillion by 2050. Absa is prioritising innovation by adopting digital solutions to enable a greater flow of trade.

“Digitisation is essential to the democratisation of trade finance in Africa, assisting SMEs to gain access to the much-needed financing to stimulate trade,” noted Michelle Knowles, Head of Trade and Working Capital at Absa CIB. “Absa has been investing in digital capabilities over the past five years, our future access to Contour’s platform is a step forward in further developing our digital roadmap and supporting our clients in their growth ambitions across the continent.”

Carl Wegner, CEO at Contour, added: “Africa is an emerging and exciting opportunity for trade finance digitisation, especially with the promise of AfCFTA in creating the first continent-wide free trade area. This will be crucial in unlocking more potential for trade growth across Africa and to its key trading partners. Absa is placing itself at the forefront of promoting sustainable growth and development for its clients.”


PXP Financial, Mastercard and Payall collaborate on cross-border payments

Acquiring and payment processing services provider PXP Financial has announced a collaboration with Mastercard and payments infrastructure provider Payall. The partnership aims to deliver safe, compliant and efficient cross-border payments and international money transfers.

This collaboration offers inclusive payment capabilities that enable PXP Financial's customers to send funds to their partners, employees and suppliers safely, efficiently and more conveniently than ever. This includes inclusive pay-out options to recipients regardless of whether they are banked or unbanked. The next step for PXP Financial is to work with Payall to open new destinations and payment channels, including sending to mobile wallets, cash pickup locations and paying directly to card.

PXP Financial began working with Payall in mid-2022, having chosen the firm for its focus on payments compliance and safety, and its fintech-level experience for end users. 

Commenting on the announcement, Kamran Hedjri, CEO of PXP Financial, said: “By leveraging Payall's proprietary compliance tech and Mastercard's innovation moving funds globally, we are now able to offer our customers speedy, safe and simple access to international payments.”

Rasika Raina, SVP, Mastercard Cross-Border Services, added: “Whether sending money home to families or working with global suppliers, the need for fast, reliable and transparent payments has never been more crucial. Through programs like this, we’re making cross-border payments safe, fast and easy for everyone.”


Paystand adds new treasury offerings for cash management

Paystand, a blockchain-enabled B2B payment network, has announced a new suite of accounts receivable and accounts payable tools designed to help businesses manage their full-cycle treasury and better optimise their cash flow under any set of market conditions.

With the Smart Treasury Management for Accounts Receivable tool, businesses can route their receivables automatically as they come in, directing the funds to the bank accounts they deem appropriate. By enabling deposit routing between unlimited banks and financial networks, CFOs and treasurers should be more easily able to diversify AR deposits and treasury sweeping between multiple institutions and, in the US, maximise the FDIC insurance benefits they offer.

With its other release, instant bill pay using AR funds, Paystand says businesses do not need to interact with bank accounts. As receivables come in, merchants can immediately direct funds to their DeFi Cards without leaving the Paystand Network. These cards can be used to pay vendors and manage operating expenses without the risk, delay or friction associated with first settling to a bank. Merchants can earn 1% back in bitcoin on every purchase with DeFi Cards.

“The SVB situation exposes a risk in banking that few paid attention to. CFOs should not have to worry about the integrity of their financial infrastructure,” said Jeremy Almond, co-founder and CEO, Paystand. “Paystand, with its decentralised payment network operating on the blockchain, gives CFOs a better solution to collecting, accessing and managing their funds no matter what. These new tools reinforce our commitment to transforming the financial network for businesses around the world.”


BBVA innovation unit launches in Colombia

BBVA has announced the roll-out of its BBVA Spark business unit in Colombia. The unit will offer an end-to-end financial services proposition aimed at entrepreneurs and tech companies at different stages of development. This includes a full range of banking products and services, specialised support and access to the tech industry ecosystem.

BBVA Spark first launched in Spain and Mexico in July 2022. This specialised unit aims to boost innovation and support enterprises shaping the future with groundbreaking tech, scalable business models and a clear strategy to grow and explore new markets. Traditionally, primarily because they are at very early stages but also because of the lack of a developed bank lending market, innovative companies resort to equity finance from private investors.

The bank has developed an end-to-end product and service range tailored to the life cycle of tech companies, from the startup stage through to their emergence as major corporations. This offering is combined with a unique user experience, with its own network of specialised bankers and consultants fully dedicated to the tech innovation segment.

Depending on its stage of development, a firm can access BBVA's full range of products for businesses (such as online banking, payroll, payments, cards and insurance) and the specific form of finance it needs.

Specifically, BBVA Spark will offer new finance models, such as ‘venture debt.’ This mode of lending, which has become widespread in other innovation ecosystems such as Silicon Valley, enables entrepreneurs to access bank finance and thus avoid seeing their equity stake diluted in private funding rounds.

BBVA Spark's product range extends to technology firms at more advanced stages. Growth loans enable companies to undertake significant investments, such as entering new markets or engaging in mergers and acquisitions.

After eight months of activity, BBVA Spark has acquired more than 500 clients. Some are as well known as the electric vehicle charging solutions provider Wallbox in Spain or the used-home buying and selling portal TuHabi in Mexico. BBVA's initiative has already mobilised more than €200m in loans and invested more than €200m in venture capital funds such as Leadwind, Lowercarbon, Fifth Wall, and Propel.

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