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EXPLAINER: Credit Suisse stuck in spotlight ahead of strategy shift

Reuters
EXPLAINER: Credit Suisse stuck in spotlight ahead of strategy shift

CREDIT SUISSE. The logo of Swiss bank Credit Suisse is seen at a branch office in Bern, Switzerland, September 26, 2022.

Arnd Wiegmann/Reuters

A string of losses, high-profile risk management failures, and changes of top leadership have drawn investor scrutiny of Switzerland's second biggest bank

ZURICH, Switzerland – Credit Suisse saw sharp falls in its shares and bonds on Monday, October 3, as markets put the bank under intense scrutiny.

The Swiss bank has insisted its capital and liquidity are strong, saying it will have more to say about a strategic revamp when it releases third-quarter results on October 27.

Why is Credit Suisse in the spotlight?

A string of losses, high-profile risk management failures, and changes of top leadership have drawn investor scrutiny of Switzerland’s second biggest bank.

Credit Suisse had to raise capital, halt share buybacks, cut its dividend, and revamp management after losing more than $5 billion from the Archegos collapse in March 2021, when it also had to suspend client funds linked to failed financier Greensill.

A spying scandal forced then-chief executive officer Tidjane Thiam to quit in 2020, and Switzerland’s financial regulator said Credit Suisse had misled it about the scale of its surveillance.

His successor Thomas Gottstein lasted until July 2022, when Credit Suisse turned to restructuring expert Ulrich Koerner as CEO and launched a second strategic review within a year to focus on its flagship wealth management business and prune back investment banking.

Chairman Axel Lehmann took over in January from Antonio Horta-Osorio, who resigned over breaking quarantine rules during the COVID-19 pandemic less than nine months after joining.

Horta-Osario’s predecessor, Urs Rohner, admitted when he left office last year that the bank had disappointed clients and shareholders, and not for the first time.

Credit Suisse’s losses have hit nearly 4 billion Swiss francs ($4 billion) over the past three quarters alone, while its financing costs have surged amid ratings downgrades.

What options does it have?

Credit Suisse has said it wants to strengthen its wealth management franchise, scale back its investment bank into a “capital-light, advisory-led” business, and evaluate strategic options for the Securitized Products business.

Analysts estimate it could face a capital shortfall of around 4 billion to 6 billion Swiss francs, depending on what it does to scale back its investment bank and how much it raises from asset sales, to restructure, support growth, and have a safety cushion.

“Asset sales will help but 4 billion Swiss francs is likely to come in the form of a highly dilutive capital raise. The good news is some of this is already in the share price,” analysts at Keefe, Bruyette & Woods wrote in a note.

A directed capital increase at a major shareholder could be an option.

As a last resort, Credit Suisse could seek state aid.

How important is the bank?

Since its foundation in 1856, Credit Suisse has played a central role in the history and development of Switzerland. It was set up by Swiss politician and businessmen Alfred Escher to finance the country’s railways and support industrialization.

Through a series of mergers and acquisitions, it has grown to become the second biggest lender in Switzerland and one of the biggest banks in Europe.

It had just over 50,000 employees and 1.6 trillion Swiss francs ($1.62 trillion) in assets under management at the end of 2021.

Credit Suisse has a domestic Swiss bank plus wealth management, investment banking, and asset management operations.

The Swiss National Bank has designated it one of Switzerland’s global systemically important banks, whose failure would cause “significant harm to the Swiss economy and financial system.”

How has the market reacted?

Credit Suisse shares have fallen more than 55% this year, while its euro-denominated bonds hit record lows on Monday.

Credit default swaps for Credit Suisse – instruments used to insure exposure to the lender’s debt – stood at 250 basis points on Monday – a sharp increase from the 57 bps at the start of the year.

– Rappler.com

$1 = 0.9876 Swiss francs

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