Following a string of scandals, bad investments and woeful risk management, Switzerland’s second largest bank, Credit Suisse, is close to the edge.
Yesterday’s much-awaited publication of Credit Suisse’s financial results for the third quarter as well as its latest strategic review gave a somewhat clearer idea of just how bad things really are under the bonnet. And it turns out they are pretty bad — so bad, in fact, that Credit Suisse’s shares yesterday (October 27) suffered their biggest daily rout ever. Today, those shares have so far barely managed to muster a rebound, even of the “dead cat” (apologies to all feline lovers) variety.
A Four Billion Dollar Loss
Credit Suisse is one of 13 European lenders on the Financial Stability Board’s list of Global Systemically Important Banks (G-SIBs). In other words, it is officially too big to fail, but it is nonetheless precariously close to failing. Yesterday it disclosed a whopping third-quarter loss of $4 billion — more than eight times average estimates of just under $500 million. The loss was largely the result of a reassessment of so-called deferred tax assets (DTA).*
This is Credit Suisse’s fourth quarterly net loss in a row. So far this year, it has posted $5.94 billion of losses. Net revenue, at $3.8 billion, was up marginally on the previous quarter but down 30% from Q3-2021. The value of its asset base has shrunk drastically, from $937 billion in December 2020 to $707 billion today. The group’s common equity Tier 1 ratio has also fallen to 12.6%, well below its target of at least 13.5%.
To right the ship, CS has presented a new strategic overhaul — its third in recent years. At the core of the overhaul is a plan to raise $4 billion of fresh capital. The good news for Credit Suisse is that it has already found a major backer — Saudi Arabia’s largest commercial bank, Saudi National Bank (SNB), which has pledged up to $1.52 billion of capital. That will give the SNB 9.9% of outstanding CS shares.
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. If nothing else, SNB’s participation will make for interesting boardroom drama given the sovereign wealth fund of Qatar, a country that is locked in a diplomatic conflict with Saudi Arabia, has a 5% stake in the Swiss lender.
The question now is whether or now CS will be able to secure the remaining $2.5 billion. The capital raise is already going to dilute existing CS shareholders, many of whom are miffed at having already poured $12.2 billion of additional capital into the lender — more than its current market value — since 2015. That was one reason why CS’s shares plunged a whopping 18.6% yesterday — their biggest daily fall ever. Those shares are now down an eye-watering 57% so far this year and over 95% since 2008.
To staunch the bleeding, the bank plans to slice its investment bank into multiple parts, exit certain businesses and sell off the rump of its securitized products group, most likely to Apollo Global Management Inc. and PIMCO. It also hopes to bring back the First Boston brand name for its US investment banking business, which Credit Suisse acquired in 1990, only to spin most of it off. According to sources cited by Reuters, CS will still maintain a large stake in CS First Boston but, over time, will wind down its position.
Credit Suisse also plans to slash 15% of its expenses between now and 2025. As part of this “radical” cost-saving plan, it will lay off 9,000 of its 52,000 employees. If all goes to plan, the bank will be back to making profits some time in 2024. But even if that happens, CS aims to achieve a return on tangible equity – a key measure of profitability – of just 6% by 2025, which means it will continue to lags its peers.
“The new Credit Suisse will definitely be profitable from 2024 onwards,” CEO Ulrich Koerner said in an interview with Bloomberg Television. “We do not want to over promise and under deliver, we want to do it the other way around.”
Bad Timing
As I noted a month ago, in Fast-Shrinking TBTF Giant Credit Suisse Is Living Dangerously, CS has chosen the worst possible moment to go cap in hand to investors, with financial conditions deteriorating rapidly worldwide, the global bear market deepening and its own market cap now valued at just $10.15 billion, less than half its value ten months ago. That makes it much harder to raise equity at a reasonable price to bolster its capital position.
“Executing this is highly dependent on economic forces beyond their control,” Chris Marinac, director of research at investment firm Janney Montgomery Scott, told Reuters. “If we were in a big market, you could probably give the company the benefit of the doubt. But because it’s fall 2022 and there’s all this uncertainty…it’s really difficult. This is the pond in which Credit Suisse swims.”
What is perhaps most striking is how quickly CS’s financial health has deteriorated. Like most European banks, Credit Suisse’s problems date back to the massive build up of private debt during the pre-crisis years and its subsequent implosion during the GFC and European sovereign debt crisis. But in the short space of the last two years it went from being a reasonably savvy wealth manager to prising the mantle of Europe’s most troubled lender from Deutsche bank, mainly due to its over-entanglement with the Archegos “family office” meltdown and the Greensill “supply chain finance” scam.
And the scandals keep coming thick and fast. In the past two years alone it has been fined for arranging a fraudulent loan to Mozambique, for laundering money for a Bulgarian cocaine trafficker and for misleading shareholders over its risk exposure to Archegos Capital. Exposure to that risk has cost the bank at least $5.5 billion.
It just paid out $234 million to settle a French tax fraud case. It has also been rebuked by regulators for spying on its executives and has been sullied by its involvement with defunct financier Greensill Capital. The fallout from that scandal has done untold damage to Credit Suisse’s reputation among its most important client segment: ultra high net worth investors.
Liquidity Problems
The recent blowout in the spreads of Credit Suisse’s credit default swaps, to levels not seen since the GFC, suggested the bank was suffering a funding crisis, as Yves pointed out in her recent post, “The Inevitable Financial Crisis“. Yesterday, CS more or less admitted as much, saying that one or more of its units breached liquidity requirements in October as a result of depositors pulling their money. In other words, the bank suffered the beginnings of a bank run.
According to a statement by CS, the withdrawals were sparked by “negative press and social media coverage based on incorrect rumors” (that the bank is in trouble, which it clearly is), and exacerbated by the fact that the bank had curtailed its access to debt markets in the weeks prior to unveiling its restructuring plan. CS stressed that its liquidity and funding ratios at the group level had been upheld at all times.
This may explain why, in October, the Swiss National Bank hit up the Federal Reserve for over $20 billion in dollar swaps. A week ago, 17 Swiss banks were allocated $11.09 billion, the largest amount requested in a single operation since the Global Financial Crisis.
According to Swiss Info, given “there were no stress signs flaring in the Swiss financial system” (apart from, of course, a gathering run on deposits at its second largest bank) the “increased appetite for dollars was probably a money-making play by smaller banks.” If that was true (which it probably isn’t), the idea of Swiss banks loading up on billions of dollars from the Fed just for an arbitrage play, would, in and of itself, be scandalous.
But as the Swiss National Bank is staying shtum on the matter, we have no way of knowing what the money was actually used for. But the mere fact that the SNB has been drawing upon dollar swaps in volumes not seen since the GFC should be serious cause for concern.
In the meantime, cracks continue to appear in CS’s latest strategic plan, reports Reuters today, with analysts and investors expressing a sense of lingering unease. One anonymous shareholder described an “overall grim picture”. According to the Spanish newspaper El Español, if CS fails to raise the requisite amount of capital, the most likely outcome will be a shotgun takeover by UBS, which would be the first ever merger of two European TBTF banks. It would probably require a significant infusion of public funds while creating the mother of all banking monopolies.
* “Deferred tax assets”, or DTAs, are assets of often dubious value. Banks (like other companies) can carry forward losses wracked up over prior years to offset their tax liabilities, if any, in the future. DTAs are the theoretical value of potential future tax savings, should the banks one day have enough taxable profits, and therefore enough tax liabilities, to use them. DTAs drew controversy during the crisis after banks were allowed to cosmetically boost their capital base by converting DTAs, which do not count toward core capital, to deferred tax credits, which do.
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Thank you, Nick.
The spotlight on deferred tax assets is interesting. Bank capital / prudential soundness is an exercise in smoke and mirrors.
There are local rules on the appropriateness of valuation allowances in connection with the DTAs and the length of time over which DTAs can be carried forward.
I was involved with the reform of these rules, the post 2008 reforms known as Basel III. It was interesting to note that US banks and non US banks with US capital markets operations were the most exercised by the need to preserve this as a form of asset and for an eternity, not time limited.
The biggest laugh was when Spanish banks wanted the value of their IT systems, which Ignacio and Nick can comment on, included as a form of capital.
I have always thought 2008 was a missed opportunity and often wonder when the failure to deal with 2008 would come back to haunt us and how.
One hopes, in particular, Harry, Irrational, Tom and Vlade pipe up.
Thanks, Colonel. You’re absolutely right that 2008 was a huge missed opportunity, but it was one that seized with ruthless efficiency by those who had helped create the crisis. And we will soon pay an even greater price.
As for the DTAs, they really are a mind-bender — or as you gracefully put it, an exercise in smoke and mirrors. I remember Wolf Richter writing a post about the tens of billions of euros of DTAs (converted into deferred tax credits) being used by Spanish, Italian, Greek and Portuguese banks as part of their capital cushion. Lord knows if that is still going on (though it wouldn’t surprise me if it is), but according to a report in April, in Spain alone the large banks had in excess of €60 billion of deferred tax credits sitting on their balance sheets.
Let’s find new money to throw after the bad money. Some 14 to 15 years after the failure of Lehman and the near death implosion of AIG (and I’ll throw Citigroup in that mix), how flipping long does it take to address these structural and institutional issues. We have our answers, it appears to take longer.
Move aside, Deutsche Bank, there is a new ring bearer for worst bank
Thank you, Griffen.
My former colleagues are relieved that Credit Suisse has relieved them of that, er, crown.
No kidding. Just when you think the Saudis might be starting to wise up, here they go again throwing billions of dumb money at some grossly mismanaged Western company.
Thank you.
You are right to point this out.
Knowing the kingdom and the firm, and having been approached by the kingdom for a job at NEOM, I reckon the kingdom wants to replicate what UBS did for Singapore(‘s wealth management centre), partner with local firms, train locals and set up systems.
Cheap money makes many brilliant investments … until interest rates rise.
The official rates matter not a jot, as CS and many others now know. Real rates are what banks are willing to oay for overnight funds else their depositors the little people who can’t DTA, will get miffed when they can’t get what they are wont to call ‘their’ money.
Sept 2019. The overnight rate was 10%.
Riiiight …. this is the entertaining part of the Greatest Depression. “The Depression to end all Depressions”. Watching the high net worth individuals losing their Charvet shirts etc.
Families that have decayed and rested on their ancestors’ laurels.
Anyone selling investments in banks should stay well away from Saudi Consulates.
Thank you and well said Patrick.
Charvet, eh? That’s a blast from the past. When finances permit, I am not averse to Thomas Pink and Turnbull & Asser. Otherwise, it’s Tyrwhitt, whose family own an estate nearby, and Lewin.
What hope for we poor souls who have to slum it in Brooke Taverners?
But many thanks, Colonel, and your savvy interlocutors, for your valuable and enlightening observations and insights.
Thank you, Nick. This stuff gives me a headache, but explained very well here. How about we make a new rule that Investment/Merchant Banks exist only as partnerships, in which the money risked is the partners’ own? Simple. They do a good job, they get rich(er). They lose the plot, they lose it all.
Thank you, KLG.
As per my comment above and previously, this is a good idea and one that the authorities did not bring back after 2008.
From the early 1970s, the NYSE allowed firms not organised as partnerships to operate as members. It took two decades and the infusion of capital from outside, e.g. Sumitomo and Kamehameha (sic) at Goldman Sachs, for firms to change (liability) structure. Within a decade or so, the firms had expanded and become enmeshed in the wider system and blew up.
Thanks for a very informative article.
Does sound Iike Groundhog Day. A bank writing off dubious assets, having liquidity problems and seeking capital from “interesting” sources.
Is the role of SNB an indicator of Saudi “soft power”. given other areas of western conflict with the desert kingdom?
Looks like interest rates rising has an inverse relationship with the lowering of tidal waters. And that means that we are seeing who has been swimming naked. And from Nick’s description of Credit Suisse, it is not a pretty sight. Hmm, I wonder how things are going with UBS Group. If things are such a s*** show at Credit Suisse, then I cannot believe that similar factors are not at work with UBS Group and that they have their own worries.
If UBS has any sense they would not agree unless the deal is significantly sweetened by the Swiss National Bank. Swiss Federal Govt is famously non-interventionist – IIRC Swissair learned that the hard way 20 years ago.
KLG’s partnership comment made me wonder what corporate form Baring’s had. I cannot remember (only remember that this was still reverberating around the Bank of England when I joined in the mid-90s) and Google is not obliging, perhaps our Colonel remembers?
Thank you.
The firm was listed. Founding family trusts owned much, but not a majority of the shares.
The firm did not have much of a balance sheet to play with and made much money from fund management, so the risk of contagion was small, sealing its fate. Interconnectedness was much less in those days.
Thanks Nick, but I’m not seeing Credit Suisse failing any time soon. Central banks exist for a variety of supposed purposes, but they really have only one primary directive…keep the banking giants whole. They had to relearn this lesson after Lehman. There will be no Creditanstalt any time soon. Witness Banca Monte Paschi di Siena. It’s the worlds oldest zombie at 398 years. It functions less as a bank then a sponge for endless capital from around the world. They are currently tottering along in search of their own 2.5B euro.
England, well along itself to economic and financial zombiehood, just had a economic coup performed by the BOE. They installed one of their own class with uncountable wealth to maintain peace in the plutocratic valley. No Northern Trust quite yet.
And here in the US, the banking parasitism keeps getting racheted up with the full support of our Central Oligarch Bank. We now have not only the time-tested Fed “put”, we have reverse-repos (yummy!) and a permanent plunge protection team situated in Chicago happy to buy banking equities at the first sign of derivative heartburn.
I suppose it will not end well, but I’m not seeing any bank failures on the horizon. Besides, one can’t be goofing on one’s golfing buddies.
And yet in the same quote Ulrich overpromises and very likely under deliver. Tsk, tsk.
re: “Today, those shares have so far barely managed to muster a rebound, even of the “dead cat” (apologies to all feline lovers) variety.”
The term “dead cat bounce” is of relatively recent origin (https://en.wikipedia.org/wiki/Dead_cat_bounce) and as Nick noted may create an image offensive to the cat-lovers among us.
In the spirit of reducing the use of offensive terms, may I suggest that “fat cats” should also be on the chopping block. An outcry led to the editing-out of the offensive term “fat” in the latest Taylor Swift music video. Clearly fat-shaming has no place in our modern society, and that should include fat-shaming cats or persons of wealth who are presumed to be too fat because of excessive food intake.
And while we’re at it, maybe the term “chopping block” should be replaced with the more modern, veg-inclusive term “cutting board”.
Check your money market account to see how much Credit Suisse paper it is holding as an “asset”.
I can’t find it now, but I believe it was Credit Suisse that was cited in an MMT-paper as an example were a bank was re-capitalised by making a loan to one of its owners.
It went something like this: Bank makes multibillion swiss franc loan. Money is deposited into owners account. Owner takes that money and invest it into bank. End result bank improves its capital and gains an asset in a claim on one of its owners. The owner gains a larger stake in the bank and now has a loan to the bank (probably on pretty good terms, seeing how he owns the bank and all). The paper noted that this was in most juridictions forbidden, but where legal can be used without problem.
If it was indeed Credit Suisse in that paper, I would expect them to use that manouver again. Pity that I can’t find it.
Does Apollo know what they are doing?
What does it do? And what happened to your English?
nb: I was replying here to a transitory spoof/spam from morbid curiosity what would ensue. Sorry I wasn’t evaporated too!
Credit Suisse is theorized to be holding Archegos’ unclosed Gamestop shorts
I see counterparty risks — and there is never just one cockroach …