Credit Suisse Needs Friends Now More Than Ever
(Bloomberg Opinion) -- It’s often when you’re most in need that you find you have the fewest friends. So it is for Credit Suisse Group AG. Its shares took another pasting on Wednesday, dropping as much as 30% to less than 2 Swiss francs ($2.17) — a record low.
In markets that have been verging on panic for days after three US lenders failed, investors are ditching anything that smells of banking risk. They are worried about deposit flight and the pain caused by rising rates. And Credit Suisse is at the top of the list of banks to bet against because of the flood of outflows it saw last year and its inability to stop making bad headlines. It’s in the middle of a complicated, radical restructuring, and its position gets more precarious the more its stock price falls and as the cost of insuring its bonds against default jumps higher.
But let’s be clear: Credit Suisse is a million miles away from Silicon Valley Bank. It has very healthy levels of liquid assets should they be needed, access to a string of central bank facilities in multiple countries, and less sensitivity to sharp moves in interest rates than many rivals, too.
Still, those headlines keep coming! The chairman of its largest shareholder, Saudi National Bank, told Bloomberg TV on Wednesday it would put no more capital into the bank if asked. It invested about $1.4 billion for its 9.9% stake last year. Thanks, friend number one.
Later in the morning, the Swiss National Bank declined to comment on the bank’s predicament — although assurances from central banks or governments can have precisely the wrong effect at times of heightened fear. However, by the afternoon, Credit Suisse had asked it for a show of support, according to the Financial Times. Please help, friend number two.
Credit Suisse also suffered another unforced error this week: It had to admit to material weaknesses in some reporting and control procedures following an intervention by US regulators. Separately, its delayed annual report on Tuesday showed that rich clients had continued to pull money from the bank in the first months of 2023, although at a much reduced pace compared with the shocking wave of outflows last October.
Chief Executive Officer Ulrich Koerner was able to tell Bloomberg TV Tuesday that Credit Suisse had seen some inflows, including on Monday as markets were selling off. Yet his words didn’t help much. The bank’s stock dropped nearly 30% at its worst on Wednesday. It is down more than one-third over five days. Its most junior bonds are trading at distressed prices.
What matters now is whether the bank can weather this storm without a crisis of faith overtaking the fundamentals of its balance sheet, which are still sound, especially when it comes to things that investors broadly are fretting about right now: liquidity and interest rate risks.
Since its deposit outflows last year, Credit Suisse has rebuilt its cushion against more withdrawals. The technical way to measure this is with its liquidity coverage ratio, but in even simpler terms the bank has enough money-like liquid assets to pay back half of all its liabilities in deposits and loans from other banks. That is a lot!
More than half of those liquid assets are plain cash. The bank has 62 billion Swiss francs deposited at central banks, which are part of its 118 billion francs in liquid assets. These are held against 233 billion francs of deposits and 12 billion francs of interbank loans. Its deposit outflows for the whole fourth quarter last year were 138 billion francs.
Credit Suisse is also a lot less exposed to losses from interest-rate moves than many rivals. “CS is really in the good bank list on this metric,” says Jérôme Legras, banking specialist and head of research at Axiom Alternative Investments in Paris. European banks are required by regulators to model their expected gains or losses from changes in the market values of their assets and liabilities due to rate shocks. For Credit Suisse, its worst loss would be 1.8 billion francs, from a parallel upward shift in rate curves. That amounts to just 3.6% of its capital base; the level at which its regulator would start to get worried is 15%.
The bottom line is that the bank could withstand a lot more deposit outflows and some serious interest-rate stress. However, clients and investors need to keep believing this for Credit Suisse to see out this turbulence.
Nothing will happen unless the Swiss National Bank sees really troubling evidence of Credit Suisse being fatally undermined. At that point, the speculation is that the central bank would try to engineer a takeover, possibly by UBS Group AG, its local rival, or potentially by another very large European bank or insurer.
For things to get that bad, the US and Europe would need to be in a full-blown crisis of trust over any banks other than the very largest. If that’s where we are headed, Credit Suisse will be far from alone in its troubles.
More From Paul J. Davies at Bloomberg Opinion:
- A Full Banking Crisis Isn’t Apparent in the SVB Wreckage
- Credit Suisse Needs a Cockroach Exterminator
- The Fed Can Stop the Next SVB Without New Rules
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.
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