Credit Suisse’s Wild Ride Is Starting To Spook Some Clients

(Bloomberg) -- On the face of it, it was almost a good week for Credit Suisse Group AG, the stock recording its biggest gain in two years.

But that glosses over a rollercoaster ride that saw the cost to insure its debt against default surge to a record, amid speculation about how the bank might finance its long-awaited restructuring. The volatile swings spooked wealthy clients, with several rich families in the Middle East and Asia collectively pulling hundreds of millions of dollars, according to people familiar with the matter.

Inside the bank, relationship managers sought to persuade clients to stay as rival bankers sought to fan speculation about Credit Suisse’s financial health, the people said, asking not to be identified because the information is private. In the end, the lender stepped in with a $3 billion bond repurchase to calm the market and take advantage of the recent selloff in its debt.

The frantic maneuvering underscores the urgency for Chief Executive Officer Ulrich Koerner to finalize a restructuring that’s been in the making for more than two months. Koerner is exploring radical cuts to the loss-making investment bank, including spinning off large parts, to avoid that its troubles eventually damage the wealth business. Yet with a key question -- how to pay for it -- unanswered less than three weeks before he’s due to present his plan, that scenario is already looking all too real.

“We are in close contact with our clients as we are working on the strategic review,” said a spokesman for Credit Suisse, which managed almost $770 billion for wealthy clients at the end of June. Figures on outflows or inflows “are disclosed as usual on a quarterly basis.”

While external investment bankers are busy sketching out how a capital raise may be structured if it’s needed, Credit Suisse executives would strongly prefer not to issue equity with the share price near record lows, people briefed on the discussions said. But with a restructuring looming that several analysts estimate will cost at least $4 billion, the firm is exploring several options to generate fresh capital.

One answer would be to bring in outside investors to help with a spinout of the investment bank’s advisory and capital markets business under the First Boston name, Bloomberg reported this week. Credit Suisse has already said that it’s interested in selling at least part of another trading business, the securitized products group, and that it’s considering other asset sales. Pimco and an investor group including Centerbridge Partners are among a shortlist of bidders for the SPG unit, Bloomberg reported Friday.

Analysts have said an initial public offering for part of Credit Suisse’s lucrative Swiss business or an IPO or sale of its asset management unit were other options to raise cash, but those are seen as less attractive options.

While investors wait for details on Koerner’s plan, the wild swings in Credit Suisse’s stock and debt are rendering the firm an easy target for rivals trying to lure its wealthy clients. Shares of the lender were down as much as 12% at the start of the week and up as much as 15% at the end. They lost more than half this year and are trading near a record low.

Bankers at competing firms -- some of them former Credit Suisse employees -- pounced on this week’s market moves, forwarding negative news stories and information on the bank’s credit default swaps to wealth management clients, according to the people. There’s a long-running debate in the industry whether such tactics are fair game when a rival is in the spotlight.

In Singapore and the Middle East, some clients requested to withdraw cash or move assets worth in the tens of millions of dollars and in some cases more, the people said, asking to remain anonymous discussing private information.

Credit Suisse managed 763 billion francs ($768 billion) for wealthy clients globally as of June 30, down from 856 billion francs at the start of the year, as stock and bond markets slumped and the bank severed relationships with some wealthy Russians. Clients in Asia and the US added money in the first half.

An Asian family office client who requested cash pulled was told by the bank that there was a queue of transactions yet to be processed, resulting in some temporary backlogs, a person with knowledge of the situation said. 

Private bankers are seeking conversations with clients to reassure them of the bank’s solid capital buffer and liquidity. They also started to propose solutions such as moving assets to third-party fiduciaries and investing cash into short-dated US treasury bills to limit any exposure, one of the people said.

Koerner tried to reassure staff in a memo that speculation about the lender’s health was unfounded. “I trust that you are not confusing our day-to-day stock price performance with the strong capital base and liquidity position of the bank,” he wrote.

Credit Suisse had a CET1 capital ratio of 13.5% at June 30, far above the international regulatory minimum of 8% and the Swiss requirement of about 10%. Its liquidity coverage ratio is one of the highest among European and US banking peers. And even if it were to get into deeper trouble, the Swiss government has been working on a new law that would provide a public liquidity backstop for systemically-relevant banks.

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