The end of 2022 could be a nightmare for Credit Suisse.
The second largest Swiss bank is once again in the line of fire, with the resurgence of fears and questions about its solvency.
The bank's shares fell on November 29 to a new life-to-date low below 3 Swiss francs, to 2.9080 Swiss francs. Since the start of the year, Credit Suisse shares have lost more than 67% of their value. Market capitalization is now only 9.05 billion Swiss francs. This last figure takes into account the issue of a first batch of new shares.
The data show that Credit Suisse is no more than a shadow of what it once was, the European banking flagship that made Switzerland proud. It’s just a giant with feet of clay.
The continued decline of the firm, plagued by repeated scandals, shows that the strategic plan presented on October 27 to try to revive Credit Suisse is struggling to convince investors. They no longer hide fears that the bank is facing a short-term liquidity crisis.
Massive Outflows
Credit Suisse's (CS) five-year credit default swaps (CDs), a form of insurance for bondholders, hit a new record high of 403 basis points, according to data from S&P Market Intelligence. This means that investors holding the bank's debt have to pay a lot more to insure themselves for the event that Credit Suisse cannot repay them. When the cost of CDSs rises sharply, it suggests that investors clearly doubt that the company will be able to honor its debts.
The new fears were reignited on Nov. 23, after the bank warned that it would post a heavy loss in the fourth quarter. This deficit is due to massive outflows of money from customers, particularly in the asset management division, seen as the centerpiece of the new Credit Suisse. There are also massive withdrawals from Swiss customers in retail banking.
"Credit Suisse would expect the investment bank and the group to report a substantial loss before taxes in the fourth quarter 2022, of up to CHF ~1.5 billion for the group," or $1.6 billion, it said in a press release. "The group’s actual results will depend on a number of factors including the investment bank’s performance for the remainder of the quarter, the continued exit of non-core positions, any goodwill impairments, and the outcome of certain other actions, including potential real estate sales."
The investment bank has been impacted by the substantial industry-wide slowdown in capital markets and reduced activity in the sales & trading businesses, exacerbating normal seasonal declines, and the group’s relative underperformance, Credit Suisse explained. Client activity remains subdued in wealth management, and the bank expects these market conditions to continue in the coming months.
However, there is worse: the firm experienced deposit and net asset outflows in the first two weeks of October at levels that "substantially" exceeded the rates incurred in the third quarter. As of November 11, net asset outflows were approximately 6% of assets under management at the end of the third quarter.
"These outflows have led the bank to partially utilize liquidity buffers at the group and legal entity level" causing the bank to fall "below certain legal entity-level regulatory requirements," Credit Suisse said.
'Demotivation'
This warning sounded the alarm with investors, who saw it as a harbinger of very bad news to come.
"In short, Credit Suisse is starting to act like a bank that’s about to go under,” analyst Tom Essaye of the Sevens Report said in a recent note.
The mistakes of the investment bank have plunged Credit Suisse into numerous successive scandals in recent years, reviving speculation about a bankruptcy or a merger with its rival UBS. Two scandals occurred almost one after the other in 2021, and caused losses of several billion dollars for the bank. The first was the bankruptcy of British company Greensill and the second was the failure of family office Archegos Capital Management.
Another sign of the nervousness and pessimism surrounding Credit Suisse: investors dumped rights to subscribe to new shares in the firm. The subscription rights tumbled 22% to 0.112 on the second day of trading on the Swiss bourse on November 29, according to Reuters.
The capital increase of 4 billion Swiss francs ($4.2 billion) was approved on November 23 by the shareholders and aims to finance the restructuring of Credit Suisse.
Credit Suisse's revamp is considered an emergency plan to clear up uncertainty about its future. The firm wants to cut 9,000 jobs by 2025, including just over 2,700, or 5% of the workforce, by December, 31.Overall, Credit Suisse wants to reduce its cost base by 14.5 billion Swiss francs in three years.
It also plans to break up the investment bank into three parts and sell a "significant portion" of its Securitized Products Group business.
The difficult year has had an impact on employee morale, Andre Helfenstein, the head of the bank’s Swiss unit, said in a recent interview with Swiss newspaper SonntagsZeitung.
"I wouldn't say demotivation, but rather a certain level of fatigue and sometimes frustration," Helfenstein said.
