SVB collapse leads to fresh Credit Suisse crisis
The global financial sector has been rocked by the collapse of SVB and Signature Bank, marking two of the largest bank failures in US history and bringing back haunting memories of the demise of Lehman Brothers that helped usher in the 2008 financial crisis.
You can read more on this in Everything You Need to Know About the SVB Collapse.
Those contagion fears have spread outside the US and Credit Suisse has found itself at the forefront of events in Europe, having now become the first major global bank to secure an emergency lifeline since the last financial crash.
The bank, the second biggest lender in Switzerland and one of the top 20 largest banks in Europe, has already suffered from a series of scandals and legal issues in recent years and is now fighting to convince the markets it is financially sound after it warned on Tuesday that its auditor has found ‘material weaknesses’ in its financial reporting controls, which in turn led to the publication of its annual report being delayed.
Credit Suisse was already vulnerable to fears surrounding a potential bank run, whereby clients race to withdraw their deposits to leave the bank short on cash, because it has already been grappling with a higher rate of withdrawals since last year in the wake of a series of failings.
News that Saudi National Bank, which bought a 10% stake in Credit Suisse last year, would not provide any more financial assistance to the bank because regulatory rules wouldn’t allow it to increase its stake led to even more concerns that major shareholders would not come to the rescue if needed. Chair Ammar Alkhudairy, when asked if more capital could be provided to Credit Suisse on Bloomberg TV yesterday, said ‘the answer is absolutely not’ – although he has since said that he doesn’t believe Credit Suisse needs more capital and has described the bank as ‘sound’.
That has also cast doubt over its ability to raise fresh equity if it needed to, especially after it raised capital less than four months ago.
Credit Suisse gets CHF50 billion liquidity injection
The drop in value of its equity, with its shares having proven highly volatile since hitting all-time lows this week, and of its bonds, with the cost of insuring them against default hitting dangerous levels, prompted Credit Suisse to open discussions with regulators on Wednesday March 15.
As a result of those talks, Credit Suisse tapped a liquidity facility provided by the Swiss National Bank to borrow CHF50 billion, equal to around $54 billion, in order to shore up its finances and try to reinstall some confidence in the markets.
Credit Suisse has also tried to show confidence by repurchasing around $3.2 billion worth of debt, which has dropped in value amid the current crisis and provided an opportunity to buy it back on the cheap.
The fresh funding, coupled with a statement from the Swiss National Bank that there are ‘no indications of a direct risk of contagion for Swiss institutions due to the current turmoil in the US banking market’, has brought some certainty to the markets today.
‘Credit Suisse meets the higher capital and liquidity requirements applicable to systemically important banks,’ the Swiss National Bank said. ‘In addition, the Swiss National Bank will provide liquidity to the globally active bank if necessary’.
Credit Suisse shares in Switzerland are up over 23% this morning as a result, although they are still down over 16% compared to this time last week and their value has plunged over 70% during the past year.
What happens next for Credit Suisse?
The support provided by the Swiss National Bank will give Credit Suisse vital breathing space at an extremely challenging time, having sunk to a hefty loss last year that swallowed up all the profits it had made over the previous decade. The 167-year old bank now finds itself trying to undertake a significant restructuring plan when confidence in the financial sector is being battered.
We are only at the early stages of the new three-year recovery plan that aims to take Credit Suisse back to its original bread-and-butter of serving the highest net worth clients by scaling-back its investment banking arm, cutting 9,000 jobs and reducing the size of its securitised products business. The concern is that its efforts to turn the bank around will be hampered by the shockwaves ripping through the broader financial system and make things even more difficult than they already are. The immediate job is to convince shareholders its plan can still deliver and that it can survive the turmoil hitting the industry.
A potential crisis has been averted, for now. Credit Suisse now has access to substantial liquidity, with management pointing toward the liquidity coverage ratio that suggests it could handle around a month’s worth of outflows if things deteriorated. It is also not as sensitive to interest rates, which was one of the reasons that brought down SVB and Signature Bank in the US. Plus, the acceleration in withdrawals we saw late last year is thought to have been stemmed in 2023, although these latest events could change that.
‘The Swiss National Bank doesn’t mess around amidst a crisis, and that should stimmy some fears of the bank’s collapse. Besides, like Deutsche Bank, Credit Suisse have been a ‘failing bank’ as long as I can remember yet both remain in business. So ultimately, I think this is a good thing for market as a whole. I’m just not sure if or when investors will draw the same conclusion with all the emotion in the air. There’s still very much a feeling of react first, think later. And that’s not always compatible for logic. So, the bigger question is will there be any others to follow? And that could continue to cloud sentiment over the foreseeable future,’ said our market analyst Matt Simpson.
There is speculation about what could happen next. There have been suggestions that the Swiss government could take a stake in Credit Suisse to inject some fresh capital. That would be welcomed by shareholders, especially after Saudi National Bank bailed, but would be the strongest signal yet that bailouts are back. Bloomberg reported that the Swiss arm of the bank could be separated, and that there is an outside chance that regulators could encourage a combination with Switzerland’s largest bank, UBS.
Will SVB and Credit Suisse impact interest rates?
Higher interest rates have contributed to the stress being applied to the global financial sector and this is raising questions about the strategy of central banks. Raising rates is the main weapon wielded when battling inflation, which is proving persistently high and is still way above ideal levels.
However, with rates also putting the global banking system under strain, markets believe central banks could slow or even pause their forthcoming rate increases to provide some stability and ensure they don’t put the system under further pressure.
The European Central Bank, which makes its latest interest rate decision today, will be the first to show its hand. A 50bps hike has been on the cards but odds of a 25bps increase have risen amid recent events. Markets will also want to see if appetite for further rate increases going forward has waned as a result.
Where next for the Credit Suisse share price?
Credit Suisse shares are trading over 23% higher in Switzerland this morning, although this is not enough to recoup all of the losses booked yesterday when it sank to all-time lows of CHF1.55. The new all-time low has introduced a new floor for the stock but we will be in unknown territory below here.
The immediate upside target is CHF2.69, marking the floor that managed to hold throughout December before remerging earlier this year. However, this would require it to break out of the downtrend that can be traced back to the start of 2022. That would allow it to bring the 50-day moving average back into the crosshairs before it can try to recapture the 100-day moving average for the first time in 15 months.
The 20 brokers that cover Credit Suisse have an average target price of CHF3.10.