- Credit Suisse is undergoing a massive strategic overhaul to restore stability and profitability after a litany of losses and scandals, but markets and stakeholders still seem unconvinced.
- On Friday, the Financial Times reported that UBS is in talks to acquire all or part of Credit Suisse, citing several people involved in the talks.
- The CEO of Ethos, which represents shareholders holding more than 3% of Credit Suisse shares, told CNBC his preference was “still a spin-off and independent listing from the Swiss division of CS.”
People walk past Credit Suisse’s New York headquarters in New York City on March 15, 2023.
Spencer Plat | Getty Images
Credit Suisse may have received a liquidity lifeline from the Swiss National Bank, but analysts are still assessing the embattled lender’s forecast, weighing the possibility of a sale and whether it is indeed “too big to fail”.
Credit Suisse management began crunch talks this weekend to assess “strategic scenarios” for the bank, Reuters reported citing sources.
It comes after the Financial Times reported on Friday that UBS is in talks to acquire all or part of Credit Suisse, citing multiple people involved in the talks. Neither bank commented on the report when contacted by CNBC.
According to the FT, the Swiss National Bank and its regulator Finma are behind the negotiations, which are aimed at increasing confidence in the Swiss banking sector. The bank’s US-listed shares were up about 7% in after-hours trading on Saturday.
Credit Suisse is undergoing a massive strategic overhaul to restore stability and profitability after a litany of losses and scandals, but markets and stakeholders still seem unconvinced.
Shares fell again on Friday, recording their worst weekly decline since the start of the coronavirus pandemic, failing to hold Thursday’s gains after an announcement that Credit Suisse would access a loan of up to 50 billion Swiss francs ($54 billion) of the central bank.
Credit Suisse lost about 38% of its deposits in the fourth quarter of 2022 and revealed in its delayed annual report earlier this week that the outflows have yet to be reversed. It reported a full-year net loss of CHF 7.3 billion for 2022 and expects a further “significant” loss in 2023, before returning to profitability next year when the restructuring begins to bear fruit.
This week’s news flow is unlikely to change the mind of savers who are considering withdrawing their money.
Meanwhile, credit default swaps, which insure bondholders against a company’s default, rose to new all-time highs this week. Bank default risk has risen to crisis levels, according to the CDS rate, with the 1-year CDS rate rising nearly 33 percentage points to 38.4% on Wednesday, before ending at 34.2% on Thursday.
It has long been rumored that Credit Suisse could be taken over in whole or in part by domestic rival UBS, which has a market cap of around $60 billion compared to its struggling compatriot’s $7 billion.
JPMorgan’s Kian Abouhossein described a takeover “as the most likely scenario, especially by UBS.”
In a note on Thursday, he said a sale to UBS would likely lead to: the Swiss bank’s IPO or spin-off of Credit Suisse to avoid “too much concentration risk and market share control in the Swiss domestic market”; the closure of its investment bank; and retention of the asset management and asset management divisions.
Both banks are reportedly opposed to the idea of a forced partnership, although this week’s events may have changed that.
Vincent Kaufmann, CEO of Ethos, a foundation that represents shareholders holding more than 3% of Credit Suisse shares, told CNBC that his preference was “still a spin-off and independent listing from the Swiss division of CS” .
“A merger would pose a very high systemic risk to Switzerland and also create a dangerous monopoly for Swiss citizens,” he added.
Bank of America strategists noted on Thursday that Swiss authorities may favor consolidation between Credit Suisse’s main domestic bank and a smaller regional partner, as any combination with UBS could create “too big a bank for the country.” .
‘Orderly solution’ needed
The bank is under pressure to come up with an “orderly” solution to the crisis, whether that be a sale to UBS or another option.
Barry Norris, CEO of Argonaut Capital, which has a short position in Credit Suisse, stressed the importance of a smooth run.
“The whole bank is essentially in a run-down and whether that run-down is orderly or disorderly is up for debate right now, but none are creating value for shareholders,” he told CNBC’s “Squawk Box Europe” on Friday.
European bank stocks have taken sharp declines during the latest Credit Suisse saga, highlighting market concerns about the contagion effect given the sheer size of the 167-year-old institution.
The industry was rocked early in the week by the collapse of Silicon Valley Bank, the largest bank failure since Lehman Brothers, along with the closing of New York-based Signature Bank.
But in terms of scale and potential impact on the global economy, these companies pale in comparison to Credit Suisse, whose balance sheet was about twice the size of Lehman Brothers when it collapsed, at about 530 billion Swiss francs by the end of 2022. It’s also much more global interrelated, with several international subsidiaries.
“I think in Europe Credit Suisse is the battleground, but if Credit Suisse has to unwind its balance sheet in a disorderly way, those problems will spread to other financial institutions in Europe and also outside the banking sector, especially I think in commercial real estate and private equity, which I think also seem vulnerable to what’s happening in the financial markets right now,” Norris warned.
The importance of an “orderly resolution” was reiterated by Andrew Kenningham, chief European economist at Capital Economics.
“As a Global Systemically Important Bank (or GSIB) it will have a resolution plan, but these plans (or ‘living wills’) have not been challenged since they were introduced during the global financial crisis,” Kenningham said.
“Experience shows that a quick resolution can be achieved without causing too much contagion, provided that authorities act decisively and senior debtors are protected.”
He added that while regulators are aware of this, as evidenced by the actions of the SNB and Swiss regulator FINMA on Wednesday, the risk of a “failed solution” will worry markets until a long-term solution to the problems of the bank becomes clear.
Central banks provide liquidity
The biggest question economists and traders are grappling with is whether Credit Suisse’s situation poses a systemic risk to the global banking system.
Oxford Economics said in a note on Friday that it was not including a financial crisis in its base case because that would require systemic problematic credit or liquidity problems. At this point, the forecast sees the problems at Credit Suisse and SVB as “a collection of several idiosyncratic problems”.
“The only overall problem we can conclude at this stage is that banks – all of which are required to hold large amounts of government debt for their volatile deposits – may be left with unrealized losses on those high-quality bonds as yields have risen,” said chief economist Adam Slater.
“We know that for most banks, including Credit Suisse, exposure to higher yields is largely hedged, so it’s hard to see a systemic problem unless it’s caused by some other factor that we’re not yet aware of. are.”
Despite this, Slater noted that “fear itself” can cause deposit refugees, which is why it will be crucial for central banks to provide liquidity.
The US Federal Reserve moved quickly to set up a new facility and protect depositors in the wake of the SVB collapse, while the Swiss National Bank has indicated it will continue to support Credit Suisse, with proactive involvement from also the European Central Bank and the Bank of England.
“So the most likely scenario is that central banks remain vigilant and provide liquidity to help the banking sector through this period. That would mean a gradual easing of tensions, as in the UK’s LDI retirement period late last year,” suggested Slater.
However, Kenningham argued that while Credit Suisse was widely seen as the weak link among Europe’s major banks, it is not alone in struggling with weak profitability in recent years.
“Moreover, this is the third ‘one-off’ problem in a few months, after the crisis in the UK government bond market in September and the US regional bank failures last week, so it would be foolish to assume that no other trouble will come the way”, he concluded.
—Katrina Bishop, Leonie Kidd and Darla Mercado of CNBC contributed to this report.