People walk by the New York headquarters of Credit Suisse on March 15, 2023 in New York City.
Spencer Platt | Getty Images
Credit Suisse may have received a liquidity lifeline from the Swiss National Bank, but analysts are still assessing the embattled lender’s prognosis, weighing the option of a sale and whether it is indeed “too big to fail.”
Credit Suisse’s management began crunch talks this weekend to assess “strategic scenarios” for the bank, Reuters reported citing sources.
It comes after the Financial Times reported Friday that UBS is in talks to take over all or part of Credit Suisse, citing multiple people involved in the discussions. Neither bank commented on the report when contacted by CNBC.
According to the FT, the Swiss National Bank and Finma, its regulator, are behind the negotiations, which are aimed at boosting confidence in the Swiss banking sector. The bank’s U.S.-listed shares were around 7% higher in after-hours trading early Saturday.
Credit Suisse is undergoing a massive strategic overhaul aimed at restoring stability and profitability after a litany of losses and scandals, but markets and stakeholders still appear unconvinced.
Shares fell again on Friday to register their worst weekly decline since the onset of the coronavirus pandemic, failing to hold on to Thursday’s gains which followed an announcement that Credit Suisse would access a loan of up to 50 billion Swiss francs ($54 billion) from the central bank.
Possible UBS sale
There has long been chatter that parts — or all — of Credit Suisse could be acquired by domestic rival UBS, which boasts a market cap of around $60 billion to its struggling compatriot’s $7 billion.
Beat Wittmann, chairman and partner at Swiss advisory firm Porta Advisors, said he expects a merger to be announced before market open Monday.
“If negotiations this weekend won’t be successful then expect that CS will be under non stop fire from a falling equity price, soaring credit default swaps prices, bank counterparties cutting lines, client assets’ outflows and international regulators in New York, London and Frankfurt,” he warned.
“Key elements of a straightforward corporate financial transaction have to be to unwind and/or sell crucial parts of the investment bank and secure continuation of the Swiss bank’s business,” Wittmann added.
JPMorgan’s Kian Abouhossein described a takeover “as the more likely scenario, especially by UBS.”
In a note Thursday, he said a sale to UBS would likely lead to: The IPO or spinoff of Credit Suisse’s Swiss bank to avoid “too much concentration risk and market share control in the Swiss domestic market”; the closure of its investment bank; and retention of its wealth management and asset management divisions.
Both banks are reportedly opposed to the idea of a forced tie-up.
BlackRock, meanwhile, denied an FT report Saturday that it is preparing a takeover bid for Credit Suisse. “BlackRock is not participating in any plans to acquire all or any part of Credit Suisse, and has no interest in doing so,” a company spokesperson told CNBC Saturday morning.
Vincent Kaufmann, CEO of Ethos, a foundation that represents shareholders holding more than 3% of Credit Suisse stock, told CNBC that its preference was “still to have a spin-off and independent listing of the Swiss division of CS.”
“A merger would pose a very high systemic risk for Switzerland and also create a dangerous Monopoly for the Swiss citizens,” he added.
Bank of America strategists noted on Thursday, meanwhile, that Swiss authorities may prefer consolidation between Credit Suisse’s flagship domestic bank and a smaller regional partner, since any combination with UBS could create “too large a bank for the country.”
‘Orderly resolution’ needed
The pressure is on for the bank to reach an “orderly” solution to the crisis, be that a sale to UBS or another option.
Barry Norris, CEO of Argonaut Capital, which has a short position in Credit Suisse, stressed the importance of a smooth outcome.
“I think in Europe, the battleground is Credit Suisse, but if Credit Suisse has to unwind its balance sheet in a disorderly way, those problems are going to spread to other financial institutions in Europe and also beyond the banking sector, particularly I think into commercial property and private equity, which also look to me to be vulnerable to what’s going on in financial markets at the moment,” Norris told “Squawk Box Europe” Friday.
The importance of an “orderly resolution” was echoed by Andrew Kenningham, chief European economist at Capital Economics.
“As a Global Systemically Important Bank (or GSIB) it will have a resolution plan but these plans (or ‘living wills’) have not been put to the test since they were introduced during the Global Financial Crisis,” Kenningham said. “Experience suggests that a quick resolution can be achieved without triggering too much contagion provided that the authorities act decisively and senior debtors are protected.”
He added that while regulators are aware of this, as evidenced by the SNB and Swiss regulator FINMA stepping in on Wednesday, the risk of a “botched resolution” will worry markets until a long-term solution to the bank’s problems becomes clear.
Stock to zero?
Despite a possible UBS acquisition, Norris still expects Credit Suisse’s stock to become worthless.
“Our view has been that the end game has always been UBS stepping in and rescuing Credit Suisse with the encouragement of the Swiss government/National Bank,” Norris told CNBC Pro Saturday.
“If this happens we would expect [Credit Suisse] equity holders to get zero, deposit holders guaranteed and probably but not certain that bond holders will be made whole.”
European banking shares have suffered steep declines throughout the latest Credit Suisse saga, highlighting market concerns about the contagion effect given the sheer scale of the 167-year-old institution.
The sector was rocked at the beginning of the week by the collapse of Silicon Valley Bank, the largest banking failure since Lehman Brothers, along with the shuttering of New York-based Signature Bank.
Yet in terms of scale and potential impact on the global economy, these companies pale in comparison to Credit Suisse, whose balance sheet is around twice the size of Lehman Brothers when it collapsed, at around 530 billion Swiss francs as of end-2022. It is also far more globally inter-connected, with multiple international subsidiaries.
For Wittmann, the demise of Credit Suisse has been “entirely self-inflicted by years of mismanagement and an epic destruction of corporate and shareholder value.”
“Broader lessons learnt will have to include minimization of investment banking, higher capital requirements, securing alignment of interest re compensation and importantly that the structurally under-resourced Swiss regulator FINMA would be brought up to fulfill its task,” he said.
Central banks to provide liquidity
The biggest question economists and traders are wrestling with is whether Credit Suisse’s situation poses a systemic risk to the global banking system.
Oxford Economics said in a note Friday that it was not incorporating a financial crisis into its baseline scenario, since that would require systemic problematic credit or liquidity issues. At the moment, the forecaster sees the problems at Credit Suisse and SVB as “a collection of different idiosyncratic issues.”
“The only generalised problem that we can infer at this stage is that banks – who have all been required to hold large amounts of sovereign debt against their flighty deposits – may be sitting on unrealised losses on those high-quality bonds as yields have risen,” said Lead Economist Adam Slater.
“We know that for most banks, including Credit Suisse, that exposure to higher yields has largely been hedged. Therefore, it is difficult to see a systemic problem unless driven by some other factor of which we are not yet aware.”
Despite this, Slater noted that “fear itself” can trigger depositor flights, which is why it will be crucial for central banks to provide liquidity.
The U.S. Federal Reserve moved quickly to establish a new facility and protect depositors in the wake of the SVB collapse, while the Swiss National Bank has signaled that it will continue to support Credit Suisse, with proactive engagement also coming from the European Central Bank and the Bank of England.
“So, the most likely scenario is that central banks remain vigilant and provide liquidity to help the banking sector through this episode. That would mean a gradual easing of tensions as in the LDI pension episode in the U.K. late last year,” Slater suggested.
Kenningham, however, argued that while Credit Suisse was widely seen as the weak link among Europe’s big banks, it is not the only one to struggle with weak profitability in recent years.
“Moreover, this is the third ‘one-off’ problem in a few months, following the UK’s gilt market crisis in September and the US regional bank failures last week, so it would be foolish to assume there will be no other problems coming down the road,” he concluded.
— CNBC’s Katrina Bishop, Leonie Kidd and Darla Mercado contributed to this report.
