“It takes 20 years to build a reputation and five minutes to ruin it” (Warren Buffett)
The problems of Credit Suisse they’ve been known for a couple of years, and therefore what happened this week could have happened to him in 2022, a few months from now, or any other time: weakness of the investment banking business, outflow of managed assets and clients as a result of past scandals that have seriously damaged its prestige, high legal amounts derived from this and an inadequate cost structure (efficiency ratio of 140%, that is, more costs than income to summarize quickly).
Switzerland’s role as the bank of the world’s great fortunes is based on an impeccable reputation for institutional discretion and maximum reliability. That makes Credit Suisse’s scandals, viral legal battles and mounting losses staggering and hard to fathom. Concern over the bank’s mounting woes has skyrocketed and shares have plummeted, forcing an appeal to the Swiss banking authorities. Since its highs of 2007, the bank has fallen on the stock market by more than 90%:
Credit Suisse’s errors include a criminal conviction for allowing drug traffickers to launder money in Bulgariagetting involved in a corruption case in Mozambique, a massive leak of customer data to the media, and a spying scandal involving a former employee and an executive (led to the resignation of previous CEO Tidjane Thiam).
His association with the disgraced financier Lex Greensill and the failed family office Archegos Capital Management it compounded the feeling that the firm did not have firm control over its affairs, prompting an unprecedented exit of fed-up clients in late 2022.
The CEO, Ulrich Koerner, launched a massive commercial action to retain the most nervous customers. The effort appeared to be paying off in January, with positive net deposit inflows. However, on March 9, the US SEC (equivalent to our CNMV) questioned the bank’s annual accounts, forcing them to delay their publication. Panic spread after the Silicon Valley Bank collapsed and investors began dumping anything that smacked of bank risk and deposit flight.
On March 15, the shares plummeted radically when the president of its largest shareholder (Saudi National Bank, which owns 9.88% of the capital) ruled out increasing his risk in the entity (liquidity and/or capital) if necessary, the response to Bloomberg was “Absolutely not.” He later clarified that “We cannot because we would exceed 10%. It’s a regulatory issue”, but it was too late, the market was left with “Absolutely not”.
This prompted Credit Suisse to ask the Swiss central bank for a public statement of support. CDS (debt default insurance) soared to levels not seen by major international banks since the Great Financial Crisis of 2008. Additional TIER 1 bonds, which are subordinated to all other debt ranks and can be called if principal falls below a predetermined level, they were trading below 80% of face value. Even the bonds that mature in April are trading at prices well below nominal.
Unlike Lehman Brothers, Credit Suisse has substantial liquid assets to draw on, access to central bank credit lines and is less sensitive than many rivals to sudden changes in interest rates. You have enough money to pay half of all your liabilities in deposits and loans from other bankss. Koerner said the company’s liquidity coverage ratio showed it can handle more than a month of strong outflows in a stressful period. The bank had an LCR liquidity ratio of 144% in Q4 2022 (vs. 100% required by regulation) and a CET1 capital ratio of 14.1% (vs. 13.1% average in Europe).
The three-year recovery plan involves the elimination of 9,000 jobs, the dismantling of the investment banking giant established for five decades and Credit Suisse’s return to its roots as a banker to the world’s ultra-rich. That means spinning off First Boston, a US investment bank it acquired in 1990 with a view to listing it in 2025, and selling parts of its securitized products unit to Apollo Global Management.
That process now risks bogging down in a broader sell-off. According to the Financial Times, UBS is negotiating the purchase of Credit Suisse to tackle the crisis. This possible operation is a priority for the Swiss authorities, since distrust has continued in recent days despite the injection of liquidity that the Swiss National Bank has provided, of 50,000 million francs. The boards of directors of the two entities are going to meet over the weekend to study the operation.
Both the case of Credit Suisse and the previous one of Silicon Valley Bank are due to isolated mismanagement, we are not facing sectoral or systemic problems.
However, I hope that the Swiss firm rises from the ashes like the phoenix. Oscar Wilde said: “Every saint has a past and every sinner has a future.”
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