The second largest bank in Europe Credit Suisse has not had a good three years. Due to numerous and frequent changes in the bank’s management, significant deficiencies in risk management, and a series of losses, investors are watching the major lender closely.
Why is all this important to you? Because Credit Suisse is a “globally systemically important bank,” of course. Its collapse could therefore lead to a financial crisis of global proportions
Is Credit Suisse about to become bankrupt?
Credit Suisse, one of the world’s oldest and most powerful banks, has seen its share price fall to an all-time low in recent days. Credit Suisse’s share price has decreased by about 60% since the beginning of 2022. At the same time, Credit Default Swap (CDS) spreads on Credit Suisse debt have risen to a 14-year high, the largest since the 2008 global financial crisis.
What is the cause of the fear regarding Credit Suisse?
A year ago, the market value of Credit Suisse was $22.3 billion. Its shares have decreased 56.2% to $3.98 in a year, and as of today, its market worth is only $10.4 billion. Spending on credit default swaps (CDS) has also reached a new high since 2008. CDS provides insurance against the default of a company’s bonds. Experts believe that while current levels are far from distressed and part of a broader market sell-off, they still indicate a deteriorating view of creditworthiness
What Caused Credit Suisse’s Recent Problems?
Several factors have heightened investor concerns about Credit Suisse’s financial outlook.
Credit Suisse has been struggling since last year. It has suffered significant losses as a result of the Archegos Capital incident
In March 2021, Archegos Capital, a US-based hedge fund, was discovered to have defrauded many banks, including Credit Suisse, Nomura, Mitsubishi UFJ Financial Group, and Deutsche Bank.
In 2019, the Chief Operating Officer, Pierre-Olivier Bouée, was sacked when it was found that he had hired private investigators to spy on high-level staff. The private investigator apparently strangely “took his own life,” according to the bank, which simultaneously announced Bouée’s dismissal.
Credit Suisse also declared in March 2021, a month before the Archegos incident became known, that it was terminating and liquidating multiple $10 billion investor funds granted to another financial services business, Greensill capital. In March 2021, Greensill filed for bankruptcy.
According to reports, investors lost about $3 billion as a result of this.
What effect did it have on Credit Suisse?
The long-term drop in Credit Suisse’s share price is one way to understand how investors have gradually left the legendary bank.
Furthermore, Credit Suisse bonds have gotten progressively cheaper since fewer individuals want to lend money to them, resulting in drastically rising rates. Larger rates suggest that the bank must pay a higher return for each dollar or euro borrowed from the market.
This becomes an issue, particularly given the current scenario confronting developed nations, when growth prospects are poor and central banks are hiking interest rates to fight inflation.
The growth in the spread of Credit Default Swaps is another cause for concern.
Credit Default Swaps of Credit Suisse
On February 2, 2023, the cost of insuring exposure to Credit Suisse debt increased after the Swiss company disclosed its largest annual loss since the 2008 global financial crisis, prompting frightened clients to flee in droves.
S&P Global Market Intelligence statistics show that five-year credit default swaps (CDS) climbed 4 basis points (bps) from Wednesday’s closing to 295 bps.
Will Credit Suisse be Stable again?
The bank wants to raise $4 billion in the capital by offering additional shares to suitable investors, including Saudi National Bank, which has promised to invest up to 1.5 billion Swiss francs.
Credit Suisse aims to reduce its workforce by 9,000 people by the end of 2025, to around 43,000.
The group will also cut its cost basis by 15%, or approximately 2.5 billion Swiss francs, resulting in a cost base of around 14.5 billion Swiss francs in 2025.
According to Andreas Venditti, an analyst at Swiss investment firm Vontobel, Koerner’s new strategic plan is “only the first step in a long journey to rebuild credibility and regain trust” among Credit Suisse’s stakeholders.
Resolute execution and no further missteps will be key and it will take time until results will begin to show,” he said.