Shares in Swiss investment bank Credit Suisse [SW:CSGN] have been rallying slightly this morning (Monday) but are still down over 13% over the last 30 days reflecting a severe lack of investor confidence. The senior management team is racing to put together a series of measures that they say they will disclose to shareholders on 27 October. Investors will be looking for a road map that will steer the troubled investment bank away from the cliff or indeed a possible fire sale.
Traders in Credit Suisse stock are playing a waiting game ahead of further news but it is expected that CEO Ulrich Koerner will strip back the investment banking division, resulting in thousands of redundancies at the bank internationally. Having worked once for an albeit smaller Swiss investment bank that went through a similar process in 2003 following a ratings downgrade, I asked some influencers in Zurich to shed light on what they think some of the possible options might be for Koerner and his team.
First off, investors will be relieved to hear that the prognosis is that Credit Suisse is going to live and is unlikely to be a new Lehman Brothers. Its issues stem from the debt side of its book, including the relative expense of that debt. This has created a cost problem for the bank. Since the Global Financial Crisis in 2008, the Swiss regulators have been at pains to ensure that the investment banking activities of Swiss banks are ring-fenced, including the separation of investment banking and overseas banking divisions into separate units. If the Credit Suisse investment bank dies, it dies alone.
Credit Suisse has said it will buy back CHF 3bn of its debt and S&P Global has also re-affirmed its A/A-1 rating, which should go some way to reassuring the market, at least as far as the wider group is concerned.
We also note the arrival of Dixit Joshi as the bank’s CFO at an opportune time to have a street fighter of his pedigree on the shop floor. A hedge fund contact of mine, Huw van Steenis (now with the World Economic Forum) recently described him as “battle-hardened from his time at Deutsche Bank.” He was part of the team that brought Deutsche Bank back from the brink following its crushing $14bn US Department of Justice fine in 2017.
Where do the issues lie for Credit Suisse?
The main problems within Credit Suisse stem from its non-Swiss investment banking operations. Some form of restructuring will have to occur here. The bank’s asset management and private banking units remain highly profitable as is its domestic Swiss corporate banking activity. These will remain very viable businesses especially given Credit Suisse’s dominance in Swiss corporate banking.
The investment bank has been bleeding money for over a decade now. Banking sources we consulted told us off the record they expected some form of recapitalisation, with the real risk for shareholders being of a discounted rights issue. But the consensus seems to be that it would be a waste of time for Credit Suisse to try to plug the holes on the investment banking side. Time to put it out of its misery?
Some important takeaways for investors here: within investment banking, it is does not pay to be an also-ran. If you are not competing for a podium spot, you are wasting your money. We could have reached a point where Credit Suisse decides the time has come to get out of investment banking completely. Many counterparties have already stopped trading with Credit Suisse and are no doubt waiting to see if there will be an investment bank they can actually trade with after 27 October.
The debt on the Credit Suisse books remains a big issue. It is a larger problem for the Swiss bank, rather than say Deutsche Bank (the demise of which has been rumoured for literally decades now). The big risk for Credit Suisse, our sources tell us, is not the deposit type liquidity ratio but the investment bank’s derivatives and collateral books. This could create issues for many counterparties’ margin books if Credit Suisse gets backed into a corner. Expect them to be already cutting their exposure as fast as they can this week.
The rumours swirling around Credit Suisse have also had an impact on other investment banks: UBS credit default swaps started to move as fear built around the Credit Suisse story. All eyes will be on the next act in this spectacular drama towards the end of this month.
