Plato Global Alpha Red Flags: Credit Suisse & SVB

The aftershocks of the Silicon Valley Bank debacle are still reverberating around the financial world. Should the venture capital firms that held their deposits with SVB and the regulators have known better? Using Plato’s proprietary 100+ Red Flags the resounding answer is yes.

Further to this, over the weekend UBS were forced into a shotgun wedding with their fiercest rival, Credit Suisse.

Again, Plato’s Red Flags indicate all the warning signs were there for all to see. Unfortunately, the discipline of digging through balance sheets and applying forensic accounting methods seems to have fallen by the wayside in the era of easy money.

Below, I highlight the red flags identified by Plato’s proprietary red flags modelling, for each of these publicly listed company. This modelling meant both SVB or Credit Suisse were screened out early in the Plato Global Alpha Fund’s investment process.

Read more about Plato’s Red Flags modelling here.

Silicon Valley Bank

Red Flag 1: Very high CHS bankruptcy probability

CFAs will remember Altman’s bankruptcy prediction model from 1968. In 2008, three Harvard, academics, Campbell, Hilscher, and Szilagy developed a more accurate model by incorporating market and financial data. Prior to the implosion, SVB’s bankruptcy probability was at extreme levels.

Red Flag 2: Significant vote against executive remuneration

Red Flag 3: Negative votes against directors

Red Flag 4: MSCI flagged concerns over the safety of SVB’s financial products

Red Flag 5: Very high downside volatility

Red Flag 6: SVB had cancelled their dividend

Red Flag 7: Miniscule savings deposits to total deposits

Just 0.9% of SVB’s deposits were savings deposits due to its corporate client base. The tightknit tech community acted almost in unison in withdrawing their deposits. Out of the 458 banks that we track globally, SVB had the 8^thlowest percentage of savings deposits. SVB also had the 18^th highest percentage of demand deposits making it particularly vulnerable to a bank run.

Red Flag 8: Very high unrecognised losses

Because SVB were intending to hold their long term treasuries to maturity, they did not have to mark them to market. All that changed when they were forced to liquidate their positions to meet deposit withdrawals. Fortunately, this was apparent in the FY22 financials with accumulated other comprehensive income accounting for some 11% of total equity.

Red Flag 9: Very high proportion of uninsured depositors

This is a Red Flag that we did not have as part of the Plato process that we are now looking to add. Some 93.8% of SVB’s deposits were over the $250,000 threshold and hence uninsured and prone to flight.

Credit Suisse

In Plato’s 10,000 stock investment universe, most companies have 0 or 1 red flags. So for a company to have over 9 red flags as with SVB really attracts our attention. Credit Suisse, had a frightening 16 red flags. Interestingly, there is a lot of overlap with the warning signs we saw for SVB. Because these flags are proprietary we do not list all of them here, so here is a subset.

Red Flag 1: Internal control weakness flagged by auditors

Red Flag 2: Very high CHS bankruptcy probability

Red Flag 3: Significant vote against executive remuneration

Red Flag 4: Financing difficulties

Red Flag 5: High impact governance events

Red Flag 6: Very poor audit quality score

Red Flag 7: Zero sell-side buy ratings

Sell side analysts are loath to place sell ratings on a company’s stock for obvious reasons. The fact there were zero buy ratings on Credit Suisse speaks volumes.

Red Flag 8: Credit default swap spikes

The CDS spread is the cost of insuring against default. For a long time, the CDS spread of Credit Suisse was similar to that of the major global banks, that is until June, 2022.