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Credit Suisse revamp jeopardised as market's confidence collapses

Bloomberg3/16/2023 12:24 PM GMT+08  • 4 min read
Credit Suisse revamp jeopardised as market's confidence collapses
Credit Suisse shares at one point lost 31% on Wednesday, the most in Bloomberg records going back to 1989. Photo: Bloomberg
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Markets are threatening to deprive Ulrich Koerner of what he says he needs most to execute his major overhaul of Credit Suisse Group AG: Time.

A day after the chief executive officer pleaded for patience, shares of Swiss the lender suffered their worst slump ever and its credit derivatives blew out to levels reminiscent of the financial meltdown of 2008. By late Wednesday, the Swiss National Bank and regulator Finma stepped in, pledging to provide a liquidity backstop if needed.

While Koerner has insisted there is nothing he can do about the share price as he focuses on executing his strategy, the wild week is raising questions about how much longer the CEO has to persuade stakeholders. The market drama carries the risk that clients or counterparties might edge away, undermining the company as it’s overhauled — with potential ramifications for the industry at large.

“Credit Suisse by some standards might be too big to fail, but also too big to be saved,” said Nouriel Roubini, the economist known for his bearish views of the global economy. Anything that happens to the firm “would be of systemic effect, not just for the European financial system, but also for the global financial system.”

Bloomberg reported earlier Wednesday that the government, central bank and Finma were in contact to discuss ways to stabilize Credit Suisse. Ideas floated — beyond the public show of support — included a separation of the bank’s Swiss unit and a long-shot orchestrated tie-up with larger Swiss rival UBS Group AG, people familiar with the matter said, cautioning that it’s unclear which, if any, of these steps would actually be executed.

UBS CEO Ralph Hamers declined to answer any “hypothetical” questions about Credit Suisse. Chairman Axel Lehmann said that government assistance wasn’t “a topic” and that the firm’s efforts to return to profitability aren’t comparable to the severe liquidity issues hitting smaller lenders in the US.

See also: UBS brings back Ermotti as CEO to oversee Credit Suisse deal

“There are no indications of a direct risk of contagion for Swiss institutions due to the current turmoil in the US banking market,” Finma and the Swiss National Bank said in their statement. They added they’re “following developments very closely and are in close contact with the Federal Department of Finance to ensure financial stability.”

Speculation about Credit Suisse’s financial health had already prompted record outflows in the final months of last year, which the bank is still working to reverse. Its admission, in an annual report delayed until this week, that it found “material weaknesses” in its reporting procedures didn’t help restore confidence.

Koerner sought to calm concerns, saying Tuesday that Credit Suisse saw inflows of deposits when markets opened after the collapse of Silicon Valley Bank. The Swiss bank’s stock stabilized after those comments, only to go into free fall Wednesday when the Saudi National Bank said it wouldn’t invest more in Credit Suisse, where it became the largest shareholder late last year.

See also: Saudi National Bank chair resigns after Credit Suisse remark

While the remarks were consistent with the Saudi National Bank’s previous stance — that it wouldn’t raise its stake above the 10% threshold that would trigger closer regulatory scrutiny — they set off panicked selling.

Credit Suisse shares at one point lost 31% on Wednesday, the most in Bloomberg records going back to 1989. Its bonds fell to levels that signal deep financial distress. Though Credit Suisse’s American depositary receipts pared losses after Swiss authorities offered assurances, the price was still down 14% at the close of regular trading in New York.

“Nobody is pleased by the share-price development, but we manage what we can manage, and this is the execution of our plan,” Koerner said Tuesday. “We said it’s a three-year transformation, and you can’t come after two months, ‘Why is everything not done?’”

Ignoring the markets, however, is increasingly difficult if clients start to worry and the bank’s cost of capital increases. Morningstar equity analyst Johann Scholtz warned Credit Suisse’s funding costs have become so high, it either needs to raise more capital or face a break-up.

“We expect the 2023 loss to increase to such an extent that its capital adequacy could be under threat,” Scholtz wrote in a note. “We believe Credit Suisse needs another rights issue.”

The alternative would be “a breakup” in which its various business lines such as the Swiss unit, asset management and wealth management divisions could be “sold or listed separately,” he said.

Credit Suisse is already in the process of carving out large parts of its investment bank. The Swiss unit, which lends to the nation’s corporations and manages the money of wealthy individuals, has been a relative bastion of stability. It’s the only one of Credit Suisse’s four divisions to be profitable each of the last three years.

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