People walk past Credit Suisse’s Latest York headquarters on March 15, 2023, Latest York.
Spencer Platt | Getty’s paintings
Credit Suisse could have received a lifeline from the Swiss National Bank, but analysts are still evaluating the lender’s projections because it considers a put option and whether it’s indeed ‘too big to fail’.
Credit Suisse executives began heated talks this weekend to evaluate “strategic scenarios” for the bank, sources told Reuters.
comes after The Financial Times reported. Friday that UBS is in talks to amass all or a part of Credit Suisse, citing multiple people involved within the discussions. Neither bank commented on the report when contacted by CNBC.
In response to the FT, the Swiss National Bank and its regulator Finma are behind the negotiations, which aim to spice up confidence within the Swiss banking sector. Banks shares listed within the US were about 7% higher in after-hours trading early Saturday.
Credit Suisse is undergoing a significant strategic overhaul to return to stability and profitability after a litany of losses and scandals, but markets and stakeholders remain unconvinced.
Shares fell again on Friday, posting its worst weekly drop because the starting of the coronavirus pandemic, failing to sustain Thursday’s gains that followed the announcement that Credit Suisse would gain access to a loan of as much as 50 billion Swiss francs ($54 billion) from the central bank.
Credit Suisse lost around 38% of its deposits within the fourth quarter of 2022 and revealed in its delayed annual report earlier this week that the outflows have yet to show. It posted a full-year net lack of CHF 7.3 billion in 2022 and expects an additional “substantial” loss in 2023 before returning to profitability next 12 months as restructuring begins to bear fruit.
This week’s news is unlikely to alter the minds of depositors considering withdrawing their money.
Meanwhile, credit default swaps, which insure bondholders against the corporate’s insolvency, soared to latest highs this week. In keeping with the CDS rate, bank default risk has risen to crisis levels, with the annualized CDS rate jumping nearly 33 percentage points to 38.4% on Wednesday before ending at 34.2% on Thursday.
UBS sale?
There has long been talk that some – or all – of Credit Suisse could be acquired by a domestic rival UBSwhose market capitalization is around $60 billion, while its struggling compatriot has $7 billion.
Kian Abouhossein of JPMorgan described the takeover “as a more likely scenario, especially by UBS.”
In a note on Thursday, it said the sale of UBS would likely result in: an initial public offering or spin-off of Swiss bank Credit Suisse to avoid “an excessive amount of risk of concentration and market share control within the Swiss domestic market”; closing your investment bank; and maintaining the wealth management and asset management departments.
Each banks reportedly oppose the concept of a forced tie-up, although this week’s events could have modified that.
Vincent Kaufmann, CEO of Ethos, a foundation representing shareholders with greater than 3% of Credit Suisse’s shares, told CNBC that he prefers “continuing the spin-off and independent listing of CS’s Swiss division.”
“A merger would pose a really high systemic risk for Switzerland and would also create a dangerous monopoly for Swiss residents,” he added.
Meanwhile, Bank of America strategists noted Thursday that Swiss authorities may prefer a consolidation between national flagship bank Credit Suisse and a smaller regional partner, as any combination with UBS could create “too big a bank for the country.”
An “orderly solution” is required.
Pressure is being placed on the bank to search out an “orderly” solution to the crisis, whether by selling UBS or another option.
Barry Norris, CEO of Argonaut Capital, who is brief at Credit Suisse, stressed the importance of a liquid consequence.
“Your entire bank is basically in liquidation and whether that liquidation is orderly or disorderly is currently under debate, neither of which creates shareholder value,” Squawk Box Europe told CNBC on Friday.
European bank stocks have seen sharp declines in the course of the recent Credit Suisse saga, highlighting market concerns in regards to the contagion effect given the sheer scale of the 167-year-old institution.
The sector was rocked earlier within the week by the collapse of Silicon Valley Bank, the most important banking failure since Lehman Brothers, with the closure of Latest York’s Signature Bank.
Nevertheless, when it comes to scale and potential impact on the worldwide economy, these corporations pale as compared to Credit Suisse, whose balance sheet is about twice that of Lehman Brothers on the time of its collapse, standing at around CHF 530 billion at the top of 2022. Additionally it is far more globally connected, with many international subsidiaries.
“I feel in Europe the battleground is Credit Suisse but when Credit Suisse has to sort out its balance sheet in a messy way these problems will spread to other financial institutions in Europe and likewise beyond the banking sector, especially I feel business real estate and personal equity, which also appear to me vulnerable to what is going on within the financial markets right away,” warned Norris.
The importance of an “orderly resolution” was echoed by Andrew Kenningham, chief European economist at Capital Economics.
“As a world systemically necessary bank (or GSIB) it is going to have a resolution plan, but those plans (or ‘living wills’) haven’t been put to the test since they were introduced in the course of the global financial crisis,” Kenningham said.
“Experience suggests that a fast resolution could be achieved without causing an excessive amount of contagion, provided authorities act decisively and senior debtors are protected.”
He added that while regulators are aware of this, as evidenced by the step-by-step of the SNB and Swiss regulator FINMA on Wednesday, the chance of a “restructuring failure” will worry markets until a long-term solution to the bank’s problems becomes clear.
Central banks provide liquidity
The largest query facing economists and traders is whether or not Credit Suisse’s situation poses a systemic risk to the worldwide banking system.
Oxford Economics said in a note on Friday that it didn’t include a financial crisis in its baseline scenario because it could require systemic credit or liquidity problems. In the mean time, the forecaster sees the issues of Credit Suisse and SVB as “a set of varied idiosyncratic problems”.
“The one general concern we will infer at this stage is that banks – who were required to carry large amounts of sovereign debt in return for his or her precarious deposits – could also be taking unrealized losses on these high-quality bonds as yields have risen,” said the chief economist Adam Slater.
“We all know that for many banks, including Credit Suisse, exposure to higher returns has been largely hedged. So it’s hard to see a systemic problem unless it’s attributable to another factor we’re not yet aware of.”
Still, Slater noted that “fear itself” could trigger depositor runs, so central bank liquidity provision might be crucial.
The US Federal Reserve hurried to determine a latest facility and protect depositors within the wake of the collapse of the SVB, while the Swiss National Bank has indicated that it is going to proceed to support Credit Suisse, with lively involvement from the European Central Bank and the Bank of England.
“So the probably scenario is that central banks remain vigilant and supply liquidity to assist the banking sector survive this episode. This may mean a gradual easing of tensions, as within the LDI retirement episode within the UK late last 12 months,” suggested Slater.
Nevertheless, Kenningham argued that while Credit Suisse was widely seen as a weak link amongst major European banks, it was not the just one combating poor profitability in recent times.
“As well as, that is the third one-off problem in a couple of months, following September’s gilt market crisis within the UK and the US regional bank failures last week, so it could be silly to assume that other problems is not going to follow the road,” he concluded.
— Katrina Bishop, Leonie Kidd, and Darla Mercado of CNBC contributed to this report.