As the ripples of contagion from the collapse of Silicon Valley Bank and Signature Bank spread out, one European bank is particularly vulnerable. And despite losing over 95% of its market value since 2008, it is still too big to fail.
The shares of Credit Suisse Group AG, the world’s most troubled systemic lender, fell by as much as 15% on Monday (March 13) to another fresh record low, before recovering slightly in the latter hours of trading. They are down a further 4% so far today (12pm CET, March 14). This latest crisis of confidence in global banking has also fuelled a fresh surge in the cost of insuring CS’s bonds against default. The five-year credit default swaps on CS’ debt surged to a new record of 453 basis points on Monday. It was the widest move of 125 European high-grade companies tracked by Bloomberg.
The panic unleashed by the collapses of Silicon Valley Bank and Signature Bank has compounded concerns about Credit Suisse’s ability to restructure its business, attract new client funds (to plug the gaping gap left behind by last year’s historic exodus), revive its investment banking business, and navigate ongoing legal and regulatory challenges. Those concerns were further exacerbated by an admission from the lender on the delayed publication of its annual report on Tuesday that “management did not design and maintain an effective risk assessment process to identify and analyze the risk of material misstatements in its financial statements.”
This comes on the heels of news last week that the Swiss lender had delayed the publication of its 2022 annual report after a “late call” on Wednesday evening from the US Securities and Exchange Commission. That call was apparently “in relation to certain open SEC comments about the technical assessment of previously disclosed revisions to the consolidated cash flow statements in the years ended December 31,2020 and 2019, as well as related controls.” None of this, of course, is confidence-inspiring.
Middle Eastern Connection
Most European banking shares have taken a beating since Friday but few as badly as Credit Suisse. One rare exception was Germany’s perennially embattled Commerzbank, which ended Monday 12% lower. But today Commerzbank, unlike CS, is in the green, albeit marginally. CS’ shares are now down 26% year to date, having fallen 67% last year.
For banks, a sharp fall in the value of shares is important since equity, along with disclosed reserves and certain other assets, make up their tier-one capital. Since barely surviving the last financial crisis without a public bailout, Credit Suisse’s stock has been in a death spiral, having lost over 95% of its value since 2007. The bank’s shareholders have already poured around $16.5 billion of additional capital into the lender since 2015, including the $4.3 billion of fresh capital raise in October. That is almost double its current market value ($9.41 billion).
As part of the most recent rights issue, the House of Saud-controlled Saudi National Bank (SNB) bought a 9.9% stake, making it Credit Suisse’s new largest shareholder. It also marked a further increase in Middle Eastern influence over the bank. Before SNB’s investment, Olayan Group (4,9%) and Qatar Investment Authority (5%) already had stakes in the lender.
NC regular Colonel Smithers previously posited that the Kingdom may be trying to replicate what UBS did for Singapore, by partnering with local firms, training locals and setting up wealth management systems. But SNB’s shareholders are already paying a high price for the investment. Since disclosing its interest in taking a stake in CS in October, SNB’s shares have fallen by roughly a third.
“Large Outflows from Wealth Management”
Just days before Silicon Valley Bank collapsed, CS’s one-time largest shareholder, Harris Associates, announced it had sold all of its holdings in the lender. In August 2022, the Chicago-based firm held 10.1% of all Credit Suisse shares but has been cutting back its exposure as the scale of CS’ troubles became apparent.
“There is a question about the future of the franchise,” Harris deputy chairman David Herro told the FT. “There have been large outflows from wealth management.”
Since the beginning of last year, Credit Suisse has been suffering a gathering run on its deposits. In total, customers pulled CHF111 billion ($121 billion) from the lender — a significant sum of money even for a TBTF lender! As Reuters reported in February, attempts by the bank’s management to obfuscate this fact has further eroded investor faith in the lender.
In an interview with Bloomberg on Dec. 2, Credit Suisse’s unfortunately named chairman, Axel Lehmann, said the deposit outflows “basically have stopped” after the bank had disclosed on Nov. 23 the loss of 84 billion francs ($90.8 billion) of client assets. This was a blatant lie: by the end of the quarter, the figure had risen to 111 billion francs, suggesting the outflows had in fact accelerated. This prompted an investigation by Swiss financial markets regulator Finma into whether Lehmann had misled investors. On Friday, Finma announced that it “sees insufficient grounds to open supervisory proceedings.” No surprises there.
But that is unlikely to have convinced Credit Suisse’s core clientele — wealthy individuals and businesses — that the bank is a safe or sensible place to deposit their money, especially given the renewed turbulence in the international financial markets. Nor is the bank’s latest admission, in its annual report, that the deposit outflows have continued, albeit at a slower rate. Nor is the fact that CS posted its fifth consecutive quarterly loss, of $1.5 billion, in the fourth quarter of 2022, taking the bank’s total full-year net loss to 7.3 billion francs ($7.9 billion).
That is marginally lower than its 2008 full-year net loss of $8.9 billion. The bank expects to post further losses this year.
“We have lots of other options to invest,” said Harris Associates’ David Herro. “Rising interest rates mean lots of European financials are headed in the other direction. Why go for something that is burning capital when the rest of the sector is now generating it?” At least that was the case before SVB’s collapse.
Unsustainable Trends
Credit Suisse is not just losing investors; it is also losing customers. Neither of these trends can be sustained for long.
In a desperate bid to recapture deposits, the bank is reportedly offering significantly higher deposit rates than its competitors to attract new funds from wealthy clients in Asia. From Reuters:
The bank is offering a 6.5 per cent annual rate on new three-month deposits of US$5 million or above, said three sources who declined to be named as they were not authorised to speak to the media. The deposit rate was first reported by Bloomberg on Thursday (Mar 2).
Credit Suisse is also offering a rate of as high as 7 per cent for one-year deposits, the sources told Reuters…
The offers are roughly 100 to 200 basis points higher than those of major rivals in the region, such as JPMorgan, UBS and Citigroup, two of the sources and a senior wealth manager said.
Amazingly, the new deposit rates are purportedly higher than CS’s actual lending rates in Asia, raising serious concerns about how the bank can maintain such a funding gap. According to one of Reuters’ sources, the offers are valid until the end of March, and only apply to new cash deposits, not existing portfolios. Total assets at Credit Suisse’s wealth division slumped by a third last year, from 742.6 billion francs to 540.5 billion francs.
This strategy is, if nothing else, a reflection of the sheer desperation that has taken hold at the bank as it tries to navigate the biggest existential crisis of its 167-year existence. And lest we forget, that crisis was almost entirely self inflicted. In just two years it went from being a reasonably savvy wealth manager to prising the mantle of Europe’s most troubled lender from Deutsche bank, mainly due to its over-entanglement with the Archegos “family office” meltdown and the Greensill “supply chain finance” scam.
As readers already know, trust in Credit Suisse’s all-important wealth management division took a beating after the Greensill debacle, in which the bank ploughed billions of dollars of client money into deeply opaque supply chain finance funds that ended up collapsing. The bank then refused to reimburse investors, telling them they will have to wait for up to five years to allow litigation against Greensill to take its course.
That crisis began in March 2021. A few weeks later, CS took another big hit — this time from its exposure to US hedge fund Archegos Capital. While other banks offering prime brokerage services to Archegos, including even Deutsche Bank, were quick to liquidate billions of dollars’ worth of stocks on which Archegos owned options after the hedge fund had failed to meet a margin call, CS was caught napping. As a result, the bank sustained $4.7 billion of losses. And its hard-earned reputation for risk-management lay in tatters.
Since then, Credit Suisse has been accused of failing to prevent a Bulgarian crime ring from laundering money connected to cocaine trafficking. After that, details of more than 30,000 of CS’ customer accounts containing more than 100 billion Swiss francs were leaked to the German newspaper Süddeutsche Zeitung, revealing some rather dubious identities among the account holders.
CS already suffered a mini-funding crisis in October last year, as one or more of its units breached liquidity requirements as a result of depositors yanking their money. In other words, the bank suffered the beginnings of a bank run. According to a statement by CS, the withdrawals were sparked by “negative press and social media coverage based on incorrect rumors” (that the bank is in trouble, which it clearly is). CS emphasised that its liquidity and funding ratios at the group level had been upheld at all times.
In my last article on this topic almost four months ago, I noted that if CS’s haemorrhaging of depositors and investors continues apace, it is only a matter of time before CS needs a bailout and/or a shotgun takeover from its larger Swiss rival, UBS, to whom it is already losing many of its high-net-worth customers. Since then the bank’s stock has done nothing but fall while the deposit exodus continues. Now, with the fast-moving fallout from two bank runs in California threatening to further erode what little trust remains in the global banking system, it is even harder to see how this fate can be avoided.