Credit Suisse’s ability to shoot itself in the foot is legendary but you would have thought its shareholders would have learned not to make matters worse. But no, the chairman of Saudi National Bank, which bought a 9.9% stake in the Swiss bank only last year, picked a terrible moment to say his firm would “absolutely not” be investing more.
To be fair, Ammar al-Khudairy gave an explanation (going over 10% would mean extra regulatory rules) and also said he didn’t think Credit Suisse needed extra capital because its financial ratios are “fine”. Too late: the market heard the “absolutely not” comment and wondered where beleaguered Credit Suisse would turn if, in fact, more capital is required.
Remember, it was only on Tuesday that the bank had to confess to “material weaknesses” in its internal controls after a prod from regulators in the US. Last year’s loss of 7.3bn Swiss francs (£6.6bn) was a record and deposit outflows have continued. A three-year turnaround plan under chief executive Ulrich Körner – the latest of many attempts to draw a line under years of scandal (Greensill, Archegos, “tuna bonds” for Mozambique) and risk-management failures – is in its infancy.
Cue a plunge in the share price, as severe as 30% at one point on Wednesday, to an all-time low, a level that is either ridiculously cheap or a prelude to full-blown crisis. The former pride of Swiss banking, an institution founded in 1856, was valued at a mere 7bn Swiss francs at its lowest point. By way of irrelevant comparison, the national chocolate champion, Nestlé, is worth almost 300bn Swiss francs.
For “don’t panic” optimists, this is just a case of jittery investors unfairly playing games of whack-a-mole after the collapse of Silicon Valley Bank in the US last week. There are no direct links between the two institutions but the market is hard-wired to hunt for the next victim. It is easy to hit Credit Suisse, a bank that everybody already regarded as the weakling among big financial institutions in Europe.
Attempting to persuade investors to look at fundamentals, the bank’s chairman, Axel Lehmann, appealed for patience. “We have strong capital ratios, a strong balance sheet,” he said. “We already took the medicine.” That last comment was presumably a reference to a 4bn Swiss franc capital-raise last year.
The bearish case is that the outside financial weather can’t be so easily ignored. The SVB blow-up, like last autumn’s crisis with UK pension funds’ LDI (liability-driven investment) strategies, has its deep roots in the rise in interest rates, which in turn has created unrealised losses on bond portfolios. One of SVB’s problems (aside from basic risk-management cock-ups) was that it had to crystallise a chunk of those losses when depositors fled. It is not unreasonable for the market to wonder where else bond pressures may blow a few holes.
In Credit Suisse’s case this week, we have seen a pattern that is worryingly familiar from banking’s crisis years of 2007-09: first, the cost of insuring an institution’s debt balloons; then, the share price gets clobbered. The process can become self-reinforcing.
Thus it was no surprise to see the FT report that Credit Suisse has appealed to the country’s central bank, the Swiss National Bank, for a public show of support. Yes, something is needed to break the negative feedback loop. One can understand hesitancy in Berne and Zurich since another lesson from 2007-09 is that, unless authorities have something genuinely new or reassuring to say, expressions of confidence can fuel further panic. But silence is not a viable strategy if the next couple of days are like Wednesday.
Unlike SVB, which wasn’t even classed as systemically important in the US (until, in death, it was), nobody is in doubt about Credit Suisse’s status. It had a balance sheet of 530bn Swiss francs at the end of last year and is classed as a “globally systemically important financial institution”, which translates as one that is definitely capable of causing contagion.
In theory, the classification should mean Credit Suisse and its regulators have a watertight plan to deal with any emergency, such as bailing-in various classes of debt-holders to strengthen capital ratios if necessary. And, since this is Switzerland, one must assume the authorities’ absolute priority will be to protect the country’s reputation as a safe home of banking.
But, as a near-300 point, or 3.8%, slump in FTSE 100 index showed, Credit Suisse’s woes have grabbed the full attention of financial markets. Situation stable? Absolutely not.
