Can Credit Suisse stay independent?
4 min read 16 Mar 2023, 10:49 PM ISTAnother crisis is being quelled, but longer term, the Swiss bank’s name may have suffered too much damage
PremiumCredit Suisse Group AG was crying out for the cavalry Wednesday and eventually it came: Swiss authorities threw down a 50 billion-franc ($54 billion) liquidity line to quell the rising panic that had threatened to overwhelm its defenses.
Another moment of acute danger in Credit Suisse’s battle to reinvent itself should pass: Its stock jumped and the riskiness of its debt improved in early trading Thursday, although those gains lost steam as the morning went on. The trouble is its chronic problems remain and that’s where investors are focused. Some still believe in an independent future for a Credit Suisse, though much reduced in size and ambition; others now see a takeover and breakup as the most likely ultimate solution.
Chief Executive Officer Ulrich Koerner and the rest of the leadership can only stick to their strategic revamp and try to win back the faith of clients and staff. Koerner told employees to keep their minds on the facts and not the sentiment. He needs depositors to do the same.
Credit Suisse has plenty of capital, no looming losses from bad assets and more than enough liquidity to meet withdrawals. It is faith not fundamentals that matters right now.
For the months ahead, the issue is that prolonged business uncertainty and another bout of sharp fear have added to worries that too much harm to the bank’s name has already been done. Staff have left and rich clients have cut their assets. It is this damage — or “franchise erosion" in bank-speak — that has led JPMorgan Chase & Co. analyst Kian Abouhossain to decide that current plans no longer do enough. He sees a sale and breakup, probably marshalled by UBS Group AG, as the most likely endgame now. At the very least, Abouhossain says the investment bank will have to be closed down entirely. No more First Boston revival.
What can Credit Suisse do to avoid this fate? First, fill the information void that has left the stock with few if any marginal supporters. Sometime near its annual shareholder meeting in early April and ahead of first-quarter results a few weeks later, the bank should be able to publish details of the historic costs and revenue of the reorganized, continuing set of businesses. This is a hugely important first step that could give analysts and investors the data they need to assess its likely profitability and make more informed decisions about what the stock ought to be worth. The sooner those numbers can come, the better.
Credit Suisse’s offer to buy back up to about $3 billion worth of its own bonds is also a bold play designed to have multiple payoffs as it fights for survival. A selloff in a bank’s shares and bonds and a jump in the cost of protecting its debt against default creates a nasty feedback loop that directly hurts its ability to operate.
These market moves make Credit Suisse a riskier counterparty for things like derivatives trades. Its clients and partners in these trades have to buy more hedges and might lead them to limit their exposure to the Swiss bank, as BNP Paribas SA reportedly did Wednesday. This is straightforwardly bad for business.
Offering to buy back debt that is trading at distressed levels boosts prices and helps bring down the cost of protection. Plus for every bond repurchased at less than face value, Credit Suisse adds to its capital by profiting on the portion of its debt it now never has to repay. Its risk is reduced, its balance sheet is further strengthened and those bondholders who didn’t sell own a safer security than they did before.
Deutsche Bank AG pursued this strategy during the depths of its crisis and Credit Suisse also already did it late last year after the German bank’s former treasurer Dixit Joshi joined as chief financial officer. It’s a smart tactic, but it so far hasn’t had the desired effect: Credit Suisse’s bonds and credit default swaps were still under pressure Thursday as US markets opened.
These are nervous days. Credit Suisse’s executives are working flat out to complete Plan A, but quietly behind the scenes they must also be discussing contingent backup plans. A UBS takeover wouldn’t be simple: It would likely have to spin off the Swiss domestic bank because the combined market share would be too great and much of the investment bank would probably still face a costly closure. The international wealth business would be the prize, but where there are common clients there would likely be some loss of business too.
Still, if any bank gets to buy Credit Suisse’s roughly 40 billion francs of tangible equity for anything close to its current 8 billion francs market value, that bank would have a lot of room for error.
Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.
