The Good News and Bad News About the World’s Most Troubled Systemic Lender, Credit Suisse

Credit Suisse may have taken an “important step” in its turnaround process, as its unfortunately named chairman, Alex Lehmann, said this week. But it is also suffering a gathering run on deposits and losing clients to its biggest rival. 

For the world’s most troubled too-big-to-fail lender, Credit Suisse, this week was punctuated by a small slice of good news and a shed load of bad. Let’s begin with the good: on Wednesday an overwhelming majority of its shareholders green-lighted the scandal-tarnished bank’s capital expansion plan, despite the fact it will heavily dilute the value of their own holdings. The first part of the plan, which was supported by 92% of shareholders, grants 462 million new shares to qualified investors including the Saudi National Bank (SNB) via a private placement. From CNBC:

The new share offering will see the SNB take a 9.9% stake, making it the bank’s biggest shareholder.

SNB Chairman Ammar AlKhudairy told CNBC in late October that the stake in Credit Suisse had been acquired at “floor price” and urged the Swiss lender “not to blink” on its radical restructuring plans.

The second part of the plan involves Credit Suisse offering 889 million new shares to existing shareholders at a price of 2.52 Swiss francs ($2.67) per share. If it is able to unload all of those shares at that price, which is still a big “IF”, it will have completed its 4 billion franc ($4.24 billion) capital expansion, which is the first part of its turnaround plan.

This may give the loss-plagued, scandal-tarnished lender just enough of a financial cushion to overcome what almost certainly represents the biggest existential crisis of its 166-year existence. CS’ unfortunately named chairman, Alex Lehmann, said the vote marked “an important step” in the creation of the “new Credit Suisse”.

The SNB has said it will hold its stake in Credit Suisse,, currently worth around $1.5 billion, for at least two years (presuming the bank is still around then). Majority controlled by the House of Saud, the SNB (not to be confused with the Swiss National Bank) has also expressed an interest in participating in future capital measures of Credit Suisse to support the establishment of an independent investment bank in Saudi Arabia.

As NC regular Colonel Smithers posited, the Kingdom may be trying to replicate what UBS did for Singapore, by partnering with local firms, training locals and setting up wealth management systems. But the shareholders of SNB are not quite so thrilled at the prospect of becoming Credit Suisse’s largest shareholder. Since disclosing its interest in taking a stake in CS in late October, SNB’s shares have fallen by 17%.

One other relative strong point for CS is that its capitalisation ratio remains at 13.5%, which is well above the requirement of 10%. But that number will fall markedly once CS confirms its entire net loss for this year.

And that is pretty much where the good news ends and the bad news begins:

1) Credit Suisse is suffering an accelerating run on its deposits. During the first two weeks of October, as markets digested Credit Suisse’s new strategic overhaul — its third in recent years — the Swiss lender started experiencing deposit and net asset outflows that “substantially exceeded” rates seen in the third quarter. In total, clients pulled 84 billion Swiss francs ($88 billion) of their money from the bank between the end of September and November 11. It is the worst exodus of funds since the financial crisis, according to Bloomberg.

At the group level, the net asset outflows represented approximately 6% of assets under management. The outflows were especially acute at the wealth management unit, where they amounted to 10% of AUM. While the outflows have been “reduced substantially from the elevated levels of the first two weeks of October 2022,” they have yet to reverse, the bank said.

This massive run on deposits explains why the Swiss National Bank hit up the Federal Reserve for over $20 billion in dollar swaps in October. In the space of just one week, 17 Swiss banks were allocated $11.09 billion, the largest amount requested in a single operation since the Global Financial Crisis.

2. Problems continue to grow in its all-important wealth management division. Lower deposits and assets under management are likely to result in reduced net interest income, commissions and fees for its wealth management division, Credit Suisse warned. So far this year, the bank as a whole has posted $5.94 billion of losses. It is now warning of a further $1.6 billion loss for the fourth quarter.

This will be especially worrisome for investors since wealth management, particularly in China where the bank expects the number of millionaires to grow significantly in the coming years, is expected to be a core driver of the bank’s future success. But it is losing money hand over fist. And its losses are another bank’s gains. According to Bloomberg, many of its clients, particularly in Asia (including China), are flocking to CS’ Swiss rival:

UBS Group AG has seen significant inflows into its Asia Pacific wealth management over the past three months from clients fleeing Credit Suisse Group AG, as its smaller Swiss rival struggles with a crisis of confidence.

Hundreds of wealthy customers have sought to place their funds with UBS in the key growth region, and the bank is planning to re-allocate staff to handle these expanding accounts, people familiar with the matter said.

 

Andreas Venditti, banking analyst at Bank Vontobel AG in Zurich, described the “massive net outflows in Wealth Management, CS’s core business alongside the Swiss Bank” as “deeply concerning — even more so as they have not yet reversed.” Credit Suisse, he added, “needs to restore trust as fast as possible — but that is easier said than done.”

Trust in the bank’s wealth management division took a big dip after the Greenhill debacle, in which the bank ploughed billions of dollars of client money into deeply opaque supply chain finance funds operated by Australian financial engineer Lex Greensill that ended up collapsing. The bank then refused to reimburse investors, telling them they will have to wait for up to five years to allow litigation against Greensill to take its course.

As Australian Financial Review noted in September, “the failure of Credit Suisse to understand the importance of maintaining an image as a financial fortress is perplexing given it sees its future in wealth management and asset management.”

3) Its stock has resumed its sharp, downward trajectory. Over the past month, Credit Suisse’s share price has continued to plumb new lows, despite the news that Saudi Arabia’s ruling family will be (indirectly) stepping in to steady the ship. The stock has shed over 20% of its value since late October — almost perfectly mirroring the fall in SNB’s stock — and a whopping 58% year to date.

Since barely surviving the last financial crisis without a public bailout, Credit Suisse’s stock has been in a death spiral, having lost 95% of its value since 2007. This puts it on a par with Deutsche Bank. For banks, a sharp fall in the value of shares is of particular import since equity, along with disclosed reserves and certain other assets makes, make up their tier-one capital. Even before its latest capital raise, CS shareholders had already poured $12.2 billion of additional capital into the lender — $2.2 billion more than its current market value — since 2015.

One reason why investors are dumping the stock is that even in the best-case scenario offered by Credit Suisse’s own turnaround plan, the bank will achieve, at most, a return on tangible equity — a  a key measure of profitability — of just 6%. And not until 2025. And that, as analysts are warning, would put it far below many of its peers and may not even be enough for the bank to earn its cost of capital.

In sum, not only are wealthy depositors jogging for the exits at a pace not seen since the last global financial crisis but shareholders are once again dumping the stock as fast as they can. If the haemorrhaging continues, it is only a matter of time before CS needs a bail out and/or a shotgun takeover from its larger Swiss rival, UBS, to whom it is apparently already losing many of its high-net-worth customers.