During these December holidays, I had the opportunity to meet up with my friends and family. When working with investments, during a family gathering, you can be sure of two things: an aunt will ask you for investment tips . The same aunt , oddly enough , will teach you how to invest . I always benefit from these conversations, as I learn a lot of market information not available on my valuation monitors or in the economics newspapers I usually read. Mainly, it is on these occasions that I study behavioral finance and what people expect from investment banks. 

Banking Sector in 2023

The year 2023 was a year to go down in history for banks. We had the failure of a record number of banks internationally, as was the case with Silicon Valley Bank , Signature Bank , Silvergate Bank and the historic sale of Credit Suisse to UBS . All of this put pressure on the banking sector like I had never seen before and brought down the price of many shares in the banking sector , reflecting the high degree of risk of a systematic crash in the sector.

Image: News of the banking sector crisis in 2023.

What is the biggest challenge for banks?

The main challenge, in most situations, lies in customer default . A bank acts as an intermediary between those who have surplus capital, such as investors , and those who need capital , such as borrowers . The more the bank carries out this intermediation, the more it profits from the spread , which, in short, represents the main source of revenue for a banking institution . This leads administrators to be tempted to increase the number of operations as much as possible. A notable example is the case of Silicon Valley , which, among other problems, experienced excessively rapid growth by granting high-risk credit to customers. This practice resulted in significant losses and contributed to the bank's rapid financial deterioration . So, a banker is always looking to expand his credit , without neglecting preventive measures regarding receiving it.

Image: News of the banking sector crisis in 2023.

High cost environment

Image: FEBRABAN news linking the high degree of regulation and its costs.

The failure of one bank can trigger a domino effect, affecting others due to the compensation system , where a bank with greater funding lends to others with a greater volume of withdrawals . This requires government regulation to prevent problems from spreading, as seen in the case of Credit Suisse , where the Swiss central bank "forced" its sale to UBS . These regulations and government intervention, although necessary, result in high operating costs for banks , due to the systems, fees and qualified professionals involved.

Swiss National Bank (SNB) will not pay dividends.

Image: News from the Swiss National Bank and its difficulties. Source: Google.

To get an idea of ​​the sector's difficulties, yesterday the Swiss National Bank (SNB) announced that, after recording losses for the second year in a row, it will not pay dividends , attributing the loss of around 3 billion Swiss francs to unfavorable positions in francs. In 2022, the SNB had already recorded a deficit of 132.5 billion Swiss francs due to the appreciation of the franc and market turmoil . The bank , which raised its interest rates twice in 2023 to combat inflation , said the loss prevents the distribution of dividends. This situation raises concerns as the lack of profit at a Swiss bank is unusual and could indicate significant changes in the financial sector.

According to my aunt's opinion, banks do not adequately remunerate investors and still charge high fees from customers, which puts us, including me, in the category of 'evil agents'. But, as we have seen, the difficulty for banks lies in attracting enough customers to form a solid financial base and finding good credit borrowers who can safely return the principal plus interest . In the midst of all this, they still need to control costs, so that, in the end, if everything goes well, there will be some profit . When I asked her about what she was doing with her savings , she explained with an air of pride how she was managing to obtain a 50% return per year on her investments . However, I will share this story in another post...

If you need help from an analyst with your investments in the banking sector , contact Wagner Geremia.

Cover Photo: Unsplash/ Floriane Vita