smallstock issue Banks can be sunk. Silicon Valley Bank’s disastrous attempt (SVB) raised funds to prove it. On March 15, Credit Suisse found that shaky shareholders can also do a lot of damage. The company’s largest shareholder, the National Bank of Saudi Arabia, appears to be suffering from a bad case of buyer’s backlash. Asked about any further investment in Credit Suisse, the Saudi bank chairman’s response was brutal: “Absolutely not, for many reasons other than the simplest regulatory and statutory.”
Investors are running around for cover. Shares in Credit Suisse plunged by a quarter to an all-time low; other European banks were also hit. There have been reports that financial institutions are reviewing their exposure to banks. At the close of the day, Swiss regulators issued a statement saying that Credit Suisse met the capital and liquidity requirements applicable to large banks, but they would provide bank support if needed. In the early hours of March 16, Credit Suisse said it would borrow up to 50 billion Swiss francs ($54 billion) from the central bank and buy back debt. That prompted some recovery in its stock price.
Investors are unlikely to lose everything. However, they have plenty of reasons to complain. Credit Suisse’s deals with family office Archegos Capital, which collapsed in 2021, and supply chain finance firm Greensill Capital, which also collapsed the same year, topped the list for multibillion-dollar losses. Customers have been withdrawing cash from every corner of the bank in the last year. It was too much for a long-term shareholder: Investment firm Harris Associates sold the last of its shares.
The new owners have been through their woes. On March 9, Credit Suisse announced it was delaying the release of its annual report due to a last-minute call from the Securities and Exchange Commission, the main U.S. financial regulator. The accounting issues in question were not a major issue, but the company’s acknowledgment of “significant deficiencies” in its financial reporting system made it difficult to reassure investors.
When shareholders finally got their hands on the report on March 14, the report was dismal. Credit Suisse posted its fifth consecutive quarterly loss by the end of 2022. The 4 billion Swiss francs raised late last year fixed the bank’s common equity-to-risk-weighted assets ratio, an important measure of a bank’s capital strength. That figure now stands at 14.1%, up from 12.6% at the end of September. But few expect it to hold steady as the bank embarks on an ambitious restructuring plan while trying to reverse a troubling outflow of cash from customers.
Plugging that cash flow is an immediate concern. Assets under management in the wealth management unit fell from 740 billion Swiss francs at the end of 2021 to just over 540 billion Swiss francs in 2022, as bankers failed to persuade ultra-wealthy clients to park their money with Credit Suisse. There has been little respite from Swiss domestic banks, usually the cash cows for the business. Total outflows in the fourth quarter amounted to 8% of assets under management, forcing the bank to use its liquidity buffers.
There could be more pain ahead, even as Credit Suisse Chief Executive Ulrich Körner looks to cut its cost base and restructure its investment banking business.The revamped investment bank, known as the CS First Boston will revolve around Michael Klein, the top leader in deal negotiations. He serves on the Credit Suisse Board until October 2022. In February, the bank bought his consulting boutique for $175 million.
There are reasons to take the intention of building a large boutique investment bank seriously. Credit Suisse has long excelled in advising on corporate takeovers that will eventually recover after a cold 2022. Giving senior executives an equity stake in a business is a logical way to attract dealmakers. But those preparing for the leap may have decided to pause this week to assess the damage.
In the event of a catastrophic run, which now seems unlikely, there is little doubt that the Swiss government would step in to rescue half of the country’s banking duopoly. One option is to partner with Credit Suisse’s better-performing compatriots, Swiss bankHowever, the business logic of such a rescue mission is weak and would cause considerable upheaval. Like Credit Suisse’s current plan, its success is far from guaranteed. ■
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