Quarterly update – Q1 2023


After a difficult 2022, the first quarter of 2023 seemed to have been all set for a recovery in the financial markets. Yet, a couple of weeks ago we received a wake-up call that reminded us of the financial crisis of 2008. Some US banks faced an old-fashioned bank run with deposits being transferred at the click of a mouse. And Crédit Suisse, still one of the world’s 30 major systemic banks, was swallowed up by fellow bank UBS under pressure from the Swiss authorities. 

What does this actually mean for your portfolio managed by CapitalatWork?

 By chance, we can explain this perfectly using the slide below. In the past months, we have explained this in detail in “tempore non suspecto” to our clients who were present at one of our many presentations.



What nobody really thinks about is the simple fact that a deposit with a bank is actually a loan to that one bank. Your money stands on that bank’s balance sheet and, in the event of problems at that bank, these deposits are not 100% guaranteed. There is a state guarantee of EUR 100,000, but amounts above this can be swept away should that bank fail. In other words, there is very little diversification of your assets if you hold them in the form of a deposit. Your portfolio at CapitalatWork is just the opposite of that. You are invested in a widely diversified portfolio of shares and bonds. This happens mainly in the form of our funds or, if you prefer, via individually held shares and bonds. These are all held in a securities account in your name and are not part of the balance sheet of CapitalatWork or your bank. A bankruptcy will therefore not put your invested savings directly at risk. And, as already stated, you are very widely spread.

Balance sheet

Typical of the business model of most banks is the fact that they generally work with a more limited Own Equity base. For most banks, this generally fluctuates between 5% and 10%. Many banks will rarely provide credit to an industrial company that has around 10% Own Equity and around 90% Borrowed Capital (=debt). In other words, the balance sheets of many banks, peculiar to their business model, are more vulnerable. If possible, losses on their assets side should exceed the Own Equity, the bank can in fact go de facto bankrupt and must then be recapitalised or taken over. The immediate withdrawability of the deposits is also problematic. On average, these deposits amount to between 20% and 30% of the balance sheet or, in other words, they constitute the funding of the bank. The companies in which we invest for you, generally have healthier balance sheets with a significantly higher Own Equity than most banks.

Free Cash Flow and Valuation

Calculating the free cash flow for the companies in which we invest for you is a difficult and intensive activity. However, trying to calculate the free cash flow of a bank with any degree of reliability and visibility is a hopeless task. Everything must go well before the shareholder of a bank can count on a remuneration. And the other 90% of the balance sheet (= the Borrowed Capital) must have already received its remuneration. The balance is then distributed to the shareholder. And this is thus unpredictable given the complexity of the balance sheet of a bank. Our portfolio of companies in which we invest for you, currently generates a return of about 4% for the bond part and generates about 7% free cash flow for the equity part. These free cash flows are not set in stone either, and will fluctuate. But we think these free cash flows are much more stable, transparent, and predictable. And spread over many sectors.

Contrarian attitude

What we do not want to do in the current circumstances, is to sow panic about the banking system.  The message is to stay rational! Despite all the above arguments that a diversified securities portfolio is preferable to a large bank deposit, it is highly unlikely that we are heading for a major crisis like the one we experienced in 2008. Banks are better capitalised (5% to 10% instead of 3% in 2008), are under stricter supervision (certainly in Europe), have parked a great deal of liquidity with the ECB, and, most importantly, for the time being, have few problematic credits. Even though we are not invested in banks, this does not mean that we are not invested in other financial institutions, which will even benefit from the current crisis, such as listed Private Equity investors and asset managers. Listed asset managers (such as CapitalatWork, but then bigger) see their business model only strengthened and even more validated.

Active and above all unconstrained

As you know, CapitalatWork is a truly active investor. Our investment process is not based on nor inspired by indices and benchmarks. In other words, we do not feel obliged to do what most investors do. We have our convictions, and we only invest in what we have been able to study ourselves. That is impossible in most other investment processes, which are rooted in all sorts of self-imposed constraints and obligations. It is no coincidence, for example, that we have almost no exposure to the bonds and shares of banks. We are simply not fans of their business model. It has therefore been a clear choice, for many years, not to be invested in this sector. Our investment process and our convictions therefore pass this test of the banking crisis with flying colours.

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