According to a report, Credit Suisse senior executives made calls this past weekend to reassure large clients, investors and other stakeholders about the bank’s liquidity and capital state.
The move came after a sudden spike in the spreads of Credit Suisse credit default swaps (CDS) on Friday, indicating the investors' concern about the company defaulting. S&P Global Market Intelligence reported that the bank’s five-year CDS went up by six basis points to nearly 247 basis points that day. Credit Suisse CDS was at 57 basis points at the beginning of the year.
Immediately after the CDS spike occurred, Credit Suisse CEO Ulrich Koerner sent a memo saying that the firm maintained a “strong capital base and liquidity position.” It also reportedly mentioned that Credit Suisse was at a “critical moment” as it prepared for a re-structurization.
Credit Suisse’s current situation
Following his appointment as the bank’s chief, Koerner faced several challenges, including investor doubts about the firm’s capital, market speculation and banker exits. The bank’s market capitalization fell to 10 billion Swiss francs (US$10.149 billion) from 30 billion francs (US$30.447 billion) in March last year, meaning that long-time shareholders lost a significant chunk of their investments.
At the end of June, the firm’s CET1 capital ratio was 13.5 percent, in the middle of its planned range for this year. Despite fulfilling Swiss authorities’ requirement of a minimum capital ratio, Friday's spike signaled a further deteriorating market.
Analysts compared Credit Suisse’s situation with Deutsche Bank AG in 2016 when it also faced a “crisis of confidence” from investors. The German lending firm used a questionable strategy to deal with the cost of a settlement related to mortgage-insured securities, leading to the bank’s CDS rising and its debt rating falling. The bank later managed to raise eight billion euros (US$7.8 billion) in capital to undergo a revamp.
According to analysts, Credit Suisse’s standing at the moment is better than Deutsche Bank at the time as it has shown a higher capital ratio and lower one-year CDS compared to its five-year CDS.
Credit Suisse told Bloomberg that it was considering selling the trading unit for its securities and South American-based wealth management operations, except in Brazil. The bank also reportedly considered re-activating First Boston, its New York-based investment banking brand. Koerner said the company would unveil its plan on October 27.
Houston we have a problem. Market cap of $CS is now a rounding error. 35x leverage. This and Deutsche Bank…a canary in coal mine.— FOSS - Lehman CDS at 9bps in '06, 🇨🇦 now at 41 (@FossGregfoss) September 30, 2022
CDS on Credit Suisse now at GFC highs. #btc pic.twitter.com/cVTOavkBv2
Bloomberg said that the bank required an additional $4 billion Swiss francs (US$4.061 billion) after selling its assets and letting go of 5,000 employees to fund a re-structurization. Credit Suisse will likely try to acquire the needed fund by raising capital.
The Financial Times reached out to a Credit Suisse executive, who denied that the bank had formally notified its investors about plans to raise capital. Instead, the executive said the Swiss-based firm wanted to avoid it due to the higher borrowing costs and record-low share price.
In the wake of the supposed move, John Vail of Nikko Asset Management discussed the possibility of Credit Suisse exiting the U.S. market. Vail said that the event could influence the Federal Reserve’s decision in the future as other banks might follow suit.
“The silver lining at end of this period is the fact that central banks will probably start to relent some time as both inflation is down and financial conditions worsen dramatically,” Vail said.