Banks Offered Another Lifeline

It was another wild weekend in banking news, so let’s go through the headlines and summarize what happened. 📰

The biggest story of the day is the shotgun marriage between Switzerland’s two largest banks. Sunday afternoon, it was reported that UBS agreed to buy its embattled rival Credit Suisse for 3 billion Swiss francs (~$3.2 billion). This was up from the initial $1 billion offer made by UBS and will see investors receive 1 UBS share for every 22.48 Credit Suisse shares they own. 

However, the deal would not go down without additional government support. The Swiss National Bank is pledging a loan of up to 100 billion Swiss francs to back the takeover. And the Swiss government will also assume losses of up to 9 billion Swiss francs from certain assets to reduce UBS’ risk. 🛡️

Ultimately, neither of these banks is in the best shape. Just take one look at their stock charts over the last two decades. However, the deal is seen as one that helped avoid any immediate systemic crisis. 🤷

As for shareholder reactions, Credit Suisse’s largest shareholder isn’t happy about the deal. The Saudi National Bank confirmed an 80% loss on its recent investment in the Swiss bank. Meanwhile, UBS rose about 3% on the news as investors assess what it means for its longer-term market position. 🕵️

Next up, the U.S. Federal Reserve and central banks from Canada, England, Japan, Europe, and Switzerland unveiled new support over the weekend. Their coordinated action “is designed to enhance the provision of liquidity through the standing U.S. dollar swap line arrangements.” Essentially, the central banks currently offering U.S. dollar operations have agreed to increase the frequency of seven-day maturity operations from weekly to daily. This is another effort to improve the market’s overall liquidity. 💱

Back in the U.S., First Republic Bank fell another 47% to fresh all-time lows. The regional bank’s shares continue to plummet despite last week’s $30 billion deposit from eleven of the U.S.’s largest banks. It’s now reported that JPMorgan is advising the bank on strategic alternatives. Some floated options include a capital raise, a sale of the bank, and more. Nothing is off the table, given outflows from the bank continue amid falling confidence. 🔻

An interesting tweet from The Kobeissi Letter pointed out that First Republic Bank shares were halted 11 times today and over 70 times over the last week. According to a quick search, that may be the most times a single stock has been halted in history—nothing to inspire confidence in depositors and shareholders like a week of erratic trading. 😮

New York Community Bancorp ($NYCB) rose 31% after the Federal Deposit Insurance Corporation (FDIC) agreed to sell NYCB deposits and loans from Signature Bank. Its subsidiary, Flagstar Bank, will assume substantially all of Signature Bank’s deposits, some of its loan portfolios, and all of its 40 former branches. That would leave roughly $60 billion in loans and $4 billion of deposits in the FDIC’s receivership. 💰

Meanwhile, the FDIC continues its search for a buyer of Silicon Valley Bank. It had trouble finding interested suitors last week, so it’s holding two separate auctions: one for its traditional deposits unit and one for its private bank. The more important news is that it will allow bank and non-bank financial firms to bid on the asset portfolios as it looks to broaden its list of potential buyers.

And lastly, Warren Buffett is reportedly in talks with the White House over the current U.S. banking crisis. Buffett and Berkshire Hathaway are often seen as one of the “lenders of last resort,” given their cash piles, but nothing concrete has come out about this yet. 🐐

For now, all eyes are on Wednesday’s Federal Reserve interest rate decision, economic projections, and commentary. As always, we’ll keep you updated as the saga continues. 👀

It’s a challenging environment for retailers, especially those of a discretionary nature. And unfortunately, sneaker and athletic apparel retailer Foot Locker is not immune to these challenges.

The company reported a decline in holiday-quarter profits. Its adjusted earnings per share of $0.97 were down from $1.46 the previous year. Meanwhile, revenues of $2.34 billion were also marginally lower than in 2021. 🔻

While Foot Locker faces many of the same challenges as other mall retailers, it also has a supplier concentration problem. In the past, Nike has made up as much as 70% of the company’s overall sales. However, in 2022 Nike began to focus more on its direct-to-consumer sales, shifting away from wholesale channels.

That left Foot Locker in a precarious position. 😬

As a result, when CEO Mary Dillon took the helm in September, she spent “a great deal of time” revitalizing the company’s partnership with Nike. During today’s earnings release, she said the two have “re-established joint planning, as well as data and insight sharing.” As a result, she expects this renewed commitment to one another to show meaningful results in this year’s holiday quarter, with momentum building into 2024. 🤝

On Nike’s end, the supply chain issues faced during the pandemic have largely been resolved. As a result, it now has sufficient inventory to stock its NIKE Direct channel as well as its traditional wholesale channels like Foot Locker. In addition, Nike reiterated the importance of its omnichannel strategy in January, saying that retail partnerships are important because consumers want to try on products and touch/feel them before buying. 👟

In addition to its progress on the Nike partnership front, the retailer continues to adjust its footprint. It’s planning to close about 400 underperforming mall stores and will open roughly 300 new format stores in North America by 2026. 🏬

Executives expect the current fiscal year sales and comparable sales to decline by 3.5% to 5.5%. They also expected adjusted earnings per share between $3.35 and $3.65.

$FL shares initially rallied over 10% on the news. However, they lost their footing throughout the day and closed down 6%. 👎

The slowdown in China’s technology sector continues. This time the victim is PDD Holdings, which owns discount e-commerce Pinduoduo and Temu. 🛒

The company’s fourth-quarter revenue of 39.82 billion yuan billion was up 46% YoY but fell short of the 41.01 billion yuan expected by analysts. That’s also down from the 65% revenue growth it reported in the third quarter. However, it’s still above the single-digit revenue growth reported by Alibaba, JD.com, and other competitors during the same period. 📉

While this quarter included only the first couple weeks of China’s reopening, management reported China’s consumption market remains resilient. Given the uptick in inflation, sales of daily essentials showed steady growth. Meanwhile, demand for high-quality merchandise like mobile phones, beauty and cosmetics, and others showed a slight uptick.

With that said, the discount retailer is facing significant pricing competition. Competitors sitting on excess inventory are bringing goods to market at often unsustainably low prices. However, executives say they won’t play that game and instead are focused on longer-term growth opportunities. 📦

Like its peers, it’s looking overseas for its next growth phase. That’s where its Temu platform comes into play. Third-party reports indicate the platform’s gross merchandise value was $192 million in January, up from just $3 million in September. It plans to roll out Temu in Canada, Australia, New Zealand, and the U.K. in 2023. 

Despite the progress, investors remained focused on the slowing growth story. Although its revenue growth remains well above some of its larger competitors, it is still slowing. And in this environment, the market continues rewarding companies that focus on profitability rather than revenue growth at any cost. 👎

$PDD shares were down about 14% on the day. 🔻