Credit Suisse: Dead Man Walking

Credit Suisse shares plunged to new lows Monday, spurring swelling fears and even suggestions the bank could face a “Lehman Brothers moment”, despite expert assurances it is too big to fail.

Switzerland’s second-largest bank saw its share price sink 11.5 percent to a historic low of 3.518 Swiss francs ($3.563) a pop, after a new salvo of rumours surrounding the scandal-plagued bank.

The Bank of England is in touch with Swiss authorities to monitor Credit Suisse, British newspaper The Sunday Telegraph reported.

And the Financial Times daily said that senior executives have sought to reassure big clients and investors in recent days about the bank’s liquidity and capital position due to concerns raised about its financial strength.

Credit Suisse chief executive Ulrich Koerner, who only took the reins and the mammoth task of revitalising the bank in August, meanwhile sent an internal message to staff on Friday to ease their concerns.

In it, he warned there were “many factually inaccurate statements being made” about the bank.

It remains unclear if his memo helped calm the nerves of Credit Suisse employees, but it appears to have drawn more attention to the dramatic swings in the bank’s share price in recent weeks, and caused further jitters among investors.

– ‘Transformation plans’ –

Fears surrounding the “transformation plans” which Koerner is due to present on October 27 have been sending the bank’s shares into a tailspin, adding to its woes after two years of repeated scandals and crises.

The bank was especially rocked by the collapse last year of the British financial firm Greensill, in which some $10 billion had been committed through four funds, and then by the implosion of the US fund Archegos, which cost it more than $5 billion.

Since March 2021, Credit Suisse’s shares have lost 70 percent of their value.

Credit Suisse shares, listed on the Swiss stock exchange’s main SMI index, recovered most of their drop suffered in Monday morning trading to close the day down 0.9 percent at 3.94 Swiss francs.

As an indication of the growing concern, the price of so-called credit default swaps, or CDS, on the bank’s bonds suddenly surged last week.

These derivative financial products tend to be taken out by investors to protect against a payment default — a deteriorating view of the Credit Suisse’s creditworthiness.

The swaps now price in a roughly 23-percent chance that the bank defaults on its bonds within five years, according to Bloomberg News, which stresses nonetheless that they remain “far from distressed”.

– ‘Lehman Brothers moment’? –

Social media is meanwhile abuzz with discussions over a looming “Lehman Brothers moment”, referring to the giant US investment bank’s spectacular collapse which kicked off the 2008 global financial crisis.

Many observers however insist there is little risk of a Credit Suisse implosion.

“Is it possible?” Ipek Ozkardeskaya, a Swissquote analyst, asked in a note.

“Yes, it is possible, but it is highly unlikely.”

Credit Suisse figures among the banks worldwide that were labelled “too big to fail” after the Lehman Brothers debacle and were required to put aside large amounts of capital to ensure they could withstand future crises without affecting the rest of the banking sector.

Ozkardeskaya envisages three scenarios, including the bank’s new chief pulling off “a miracle” and quickly strengthening Credit Suisse as promised, “and the bank survives and thrives until the next scandal”.

A second scenario involves the Zurich-based bank becoming “a nice takeover target, and (getting) eaten by another bank,” while the third sees it “saved by the Swiss government.”

– ‘Buy time’ –

So far, the bank has provided no insight into the details of the coming “transformation plans”, beyond suggesting that it could include asset sales.

But even these few details have sparked concerns, with Jefferies analysts warning that “asset sales alone are unlikely to be the solution to the potential capital shortfall problem.”

Credit Suisse in this case would be “a forced seller”, they wrote in a note, pointing out that this could “create price pressure”.

And while selling assets might “generate capital”, they warned it could also “reduce future earnings generation capacity”.

But asset sales could, the note acknowledged, “be a first step and buy time until shares recover and the outlook gets better.”

In his memo to staff Friday, Koerner meanwhile insisted on the “strong capital base and liquidity position of the bank.”

“We are in the process of reshaping Credit Suisse for a long-term, sustainable future — with significant potential for value creation,” he wrote.

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