Swiss bank Credit Suisse is the latest focus of global investors’ anxieties. The Zurich-based bank, which dates back to 1856, has lost nearly 59% of its value this year as concerns grow about its financial viability.
Meanwhile, the bank has moved to reassure external stakeholders and staff about its position. Ulrich Koerner told employees last week to ignore the recent share price weakness and focus on “its strong capital base and liquidity position”.
Credit default swaps (CDS) and collateralized debt obligations (CDO).
Investors have not been so excited about these types of derivatives since the Eurozone debt crisis, which reached its peak 10 years ago. Credit Suisse CDS soared to record highs on Monday, a reflection of the perceived riskiness of the Swiss bank. Social media quickly picked up on Reddit posts about Credit Suisse’s precarious position, which naturally attracted short sellers and speculators (and many, many references to "Debit Suisse").
Essentially, they are derivatives that act like insurance contracts against a company or sovereign defaulting – the bigger the CDS, the higher the risk, and the more expensive they are to buy. They can be bought as short- and long-term instruments.
The bank has launched a strategic review and will provide further details at its Q3 results on October 27. What does this review involve? Mainly asset sales, of poorly performing units, lowering costs via job cuts and what it described as a “company-wide digital transformation”. The focus is on the investment bank, which could be split up and restructured as a “capital-light” business catering for advisory and markets clients.
Thoughts of the Global Financial Crisis (GFC).
As with the financial crisis of 2008-2009, some investors are concerned that Credit Suisse’s problems are evidence of the risk of contagion among European banks. But banks are better capitalised than before the GFC, with higher capital ratios, and rising interest rates increase the profitability of lending in the sector. The company also earns revenues in Swiss francs, one of the best performing currencies in the world this year aside from the USD.
Dividends were briefly suspended across the European banking sector under regulatory pressure during the Covid crisis, but Europe’s banks have since restored payouts across the board. Looking at Credit Suisse’s nearest and bigger rival, UBS, its shares have weakened since September but are off just 12% in 2022 and rose 1% on Monday on a day. While Credit Suisse shares plummeted on Monday morning, they are now down less than 1% on Friday's close.
Still, last week, the European Systemic Risk Board said the continent faced risks to its financial stability because of the impact of the Russian invasion of Ukraine and looming recession. Europe’s financial indicators, such as Purchasing Manager Indices and employment data, suggest that the bloc is showing more signs of strain than in the U.S. The euro broke through $1 this September to multi-decade lows.
Ratings agency DBRS Morningstar on internal turmoil.
External challenges such as war, inflation and interest rate hikes, are colliding with internal issues such as changes in leadership.
Thomas Gottstein resigned this summer as the CEO and Ulrich Koerner took over on August 1, 2022. Former chair Antonio Horta-Osorio resigned at the start of 2022 after breaking quarantine rules. The company has also been associated with various scandals, including Archegos and Greensill Capital. Credit Suisse and its clients have taken a financial hit from connections to the Archegos Capital Management – a family office whose founder has been indicted on charges of fraud and racketeering.
Whilst some banks and businesses could benefit from high market volatility, DBRS Morningstar believes that for CSG the challenges are being exacerbated by the various management changes in a short period of time, alongside the challenges to define and execute a clear strategy, particularly in its Investment Bank.
Management stability is a key consideration for any organisation’s reputation as robust management should be able to design and execute a consistent strategy that preserves the value of the franchise and count on the support of shareholders and investors.
DBRS Morningstar rates Credit Suisse at A (low) with a negative trend. The A (low) level is underpinned by the Group’s sound capital position and takes into account that the Group has taken actions to improve risk management, including several management changes and is de-risking through the exit of some investment banking businesses. However, the Negative trend reflects that the full reputational and franchise impact of risk management shortcomings could translate into lower business volumes.
DBRS Morningstar said it is monitoring developments at the bank that could affects its credit position in the future. You can read the DBRS note in detail.