Fears grow for global investment bank

The share price of the scandal-plagued bank, which spent the weekend trying to reassure investors of its capital and liquidity position, fell around 12 per cent in wild trading to a historic low of 3.518 Swiss francs ($5.44), before clawing back to finish the day at 3.94 francs ($6.09), slightly down from its Friday closing price.

Its shares, listed on the Swiss stock exchange’s main SMI index, are already down around 60 per cent over the past 12 months following a string of costly scandals, and have lost 70 per cent of their value since March 2021.

Meanwhile on Monday, prices for Credit Suisse credit default swaps (CDS), which act as insurance against a company defaulting on its bonds, soared by as much as 100 basis points to fresh record highs, with some traders quoting as high as 350 basis points, according to the Financial Times, from around 60 at the start of this year.

The swaps now price in a roughly 23 per cent chance that the bank defaults on its bonds within five years, according to Bloomberg, which stresses nonetheless that they remain “far from distressed”.

It came after a sharp rise in the bank’s CDS on Friday sparked fevered online speculation that Switzerland’s second-largest bank was facing a looming “Lehman Brothers moment”, referring to the giant US investment bank’s spectacular collapse which kicked off the 2008 global financial crisis.

That prompted chief executive Ulrich Koerner, who took the reins in August, to issue a company-wide memo stressing the bank’s strength and urging employees not to confuse the “day-to-day” share price performance with its “strong capital base and liquidity position”.

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Conceding the bank was at a “critical moment” as it prepares for a major restructuring announcement later this month, Mr Koerner said there were “many factually inaccurate statements being made”.

“No doubt there will be more noise in the markets and the press between now and the end of October,” he wrote. “All I can tell you is to remain disciplined and stay as close as ever to your clients and colleagues.”

Senior executives reportedly then spent the weekend hitting the phones with top clients and counterparties trying to calm nerves.

“A point of concern for many stakeholders, including speculation by the media, continues to be our capitalisation and financial strength,” staff were told in another internal note on Sunday.

“Our position in this respect is clear. Credit Suisse has a strong capital and liquidity position and balance sheet. Share price developments do not change this fact.”

Mr Koerner’s memo appears to have had the opposite intended effect, drawing further attention to the bank’s precarious position and inviting comparisons with Lehman Brothers and Bear Stearns insisting to creditors that everything was fine.

The Bank of England is in touch with Swiss authorities to monitor Credit Suisse, British newspaper The Sunday Telegraph reported.

Two years of scandals

Fears surrounding the “transformation plans” which Mr Koerner is due to present on October 27 have been sending the bank’s shares into a tailspin, adding to its woes after two years of repeated scandals and crises.

Credit Suisse was at the centre of the collapse of controversial finance company Greensill Capital last year, in which some $US10 billion ($15.4 billion) had been committed through four funds, the implosion of hedge fund Archegos Capital Management, which cost it more than $US5 billion ($7.7 billion).

It was also hit with a £350 million ($608 million) fine from global regulators for its involvement in the so-called Mozambique “tuna bonds” corruption scandal.

In the past three quarters alone it has racked up losses of nearly 4 billion Swiss francs ($6.2 billion), and analysts have estimated that it will have a shortfall of at least the same amount even after selling some assets to fund its restructuring, growth efforts and any unknowns.

So far, the bank has provided no insight into the details of the coming “transformation plans”, beyond suggesting that it could include asset sales and up to 5000 job cuts.

But even these few details have sparked concerns, with Jefferies analysts warning that “asset sales alone are unlikely to be the solution to the potential capital shortfall problem”.

Credit Suisse in this case would be “a forced seller”, they wrote in a note, pointing out that this could “create price pressure”.

And while selling assets might “generate capital”, they warned it could also “reduce future earnings generation capacity”.

But asset sales could, the note acknowledged, “be a first step and buy time until shares recover and the outlook gets better”.

Speaking to the Financial Times over the weekend, a Credit Suisse executive denied recent reports that the bank had approached investors about raising more capital.

The executive insisted that the bank was trying to avoid such a move with its share price near record lows and higher borrowing costs due to ratings downgrades.

As Bloomberg noted last week, Credit Suisse’s market capitalisation has dropped to around 10 billion Swiss francs ($15.5 billion), down from more than 30 billion ($46.4 billion) in March 2021, meaning any share sale would be highly dilutive to long-time investors.

Bank is ‘too big to fail’

Many observers, however, insist there is little risk of a Credit Suisse implosion.

“We spent the weekend talking about whether Credit Suisse will finally go bust or not,” Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said in a note on Monday, acknowledging that the CDS spike meant the market was “aggressively pricing a default for one of the biggest Swiss banks”.

“Is it possible? Yes, it is possible, but it is highly unlikely,” she said.

Credit Suisse figures among the banks worldwide that were labelled “too big to fail” – so-called global systemically important banks (G-SIBs) – after the Lehman Brothers debacle and were required to put aside large amounts of capital to ensure they could withstand future crises without affecting the rest of the banking sector.

“What will likely happen is, either there is a miracle this Christmas and the bank’s new CEO strengthens the back of the bank in 100 days as he promised, and the bank survives and thrives until the next scandal,” she said.

“Or the bank will become a nice takeover target, and be eaten by another bank. Or it will be saved by the Swiss government.”

Analysts at rival investment banks have also stepped up to defend Credit Suisse, with Goldman Sachs describing the panic as “unwarranted” and JP Morgan pointing out its capital and liquidity ratio are “well above requirements”.

Credit Suisse executives have previously noted that the bank’s CET1 capital ratio, a measure of financial strength which compares a bank’s capital against its assets, was 13.5 per cent as of June 30, well above the 10 per cent required by Swiss authorities and the international regulatory minimum of 8 per cent.

Ben Marlow, financial columnist with The Telegraph, wrote on Monday that Mr Koerner’s “attempts to calm markets appear to have fallen on deaf ears, even when backed up by credible City analysts”.

“Given the nervousness sweeping through febrile markets since [UK Chancellor of the Exchequer] Kwasi Kwarteng’s kamikaze mini-budget, Koerner is guilty of failing to read the mood,” Marlow wrote, describing the “critical moment” memo as “particularly naive given the rumours swirling on Reddit and Twitter about the strength of the lender’s balance sheet”.

“But it also speaks to the growing role of social media and the influence of armchair traders in financial markets when the chief executive of a major global bank is drowned out by entirely unfounded speculation on Twitter and internet forums,” he added.

frank.chung@news.com.au

– with AFP