Good news and bad news about the world’s most troubled system lender, Credit Suisse

Credit Suisse may have taken a “major step” in the reorganization process, its sadly appointed chairman, Alex Lehmann, said this week. But it is also suffering from an influx of deposits and losing customers to its biggest competitor.

For Credit Suisse, the world’s most troubled lender, too big to fail, this week has been marked by a bit of good news and a lot of bad. Let’s start with the good news: On Wednesday, the vast majority of its shareholders gave the green light to the bank’s capital increase plan, despite the fact that it would greatly dilute the value of their own assets. The first part of the plan, which was supported by 92% of shareholders, provides 462 million new shares to qualified investors, including the National Bank of Saudi Arabia (SNB), through a private placement. From CNBC:

As part of the new share offering, the SNB will receive 9.9% of the shares, making it the bank’s largest shareholder.

SNB Chairman Ammar Al-Khudairi told CNBC in late October that the stake in Credit Suisse was acquired at a “floor price” and urged the Swiss lender to “don’t blink” in its sweeping restructuring plans.

The second part of the plan involves Credit Suisse offering 889 million new shares to existing shareholders at CHF 2.52 ($2.67) per share. If he can sell all those shares at that price, he will complete a 4 billion franc ($4.24 billion) capital expansion, the first part of his recovery plan.

This could give the loss-weary, scandal-stained lender enough financial cushion to overcome what is almost certainly the biggest existential crisis of its 166-year existence. Unfortunately, CS chairman-designate Alex Lehmann said the vote marked a “major step” in the creation of a “new Credit Suisse”.

SNB said it would hold its stake in Credit Suisse, which currently stands at about $1.5 billion, for at least two years (assuming the bank still exists). The SNB (not to be confused with the Swiss National Bank), most of which is controlled by the House of Saud, has also expressed interest in participating in Credit Suisse’s future capital action to support the establishment of an independent investment bank in Saudi Arabia.

Like a regular North Carolina Colonel Smithers installedThe kingdom may be trying to replicate what UBS has done for Singapore by partnering with local firms, educating local residents and building asset management systems. But SNB shareholders are less than enthusiastic about the prospect of becoming the largest shareholder in the world’s most troubled “too big to fail” lender. Since the announcement of interest in acquiring a stake in CS at the end of October, SNB shares have fallen by 17%.

Another comparative advantage of CS is that its capitalization ratio remains at 13.5%, which is well above the required level of 10%. But that number will drop significantly once CS confirms the entire net loss for this year.

And that’s where the good news ends and the bad begins:

1) Credit Suisse is suffering from accelerated withdrawals.. During the first two weeks of October, as markets digested Credit Suisse’s new strategic overhaul – the third in recent years – the Swiss lender began experiencing deposit and net asset outflows that “significantly exceeded” the numbers seen in the third quarter. In total, customers withdrew 84 billion Swiss francs ($88 billion) from the bank between the end of September and November 11. bloomberg.

At the group level, net asset outflows represent approximately 6% of assets under management. The outflow was particularly acute in the wealth management division, where it amounted to 10% of AUM. The bank said that while outflows are “substantially down from the elevated levels of the first two weeks of October 2022,” they have not yet reversed.

The run on deposits explains why the Swiss National Bank raised more than $20 billion in dollar swaps from the Federal Reserve in October. In just one week, 17 Swiss banks were given $11.09 billion, the largest amount requested in a single transaction since the global financial crisis.

2. Pproblems continue to grow in his all-important money managementt division. Credit Suisse warned that the reduction in deposits and assets under management is likely to result in lower net interest income, fees and charges for the asset management division. So far this year, the bank as a whole has reported losses of $5.94 billion. Now he is warning of a further loss of $1.6 billion for the fourth quarter.

This will be of particular concern to investors as asset management, especially in China, where the bank expects significant growth in the number of millionaires in the coming years, will be a major factor in the bank’s future success. But this is a loss of money hand in hand. And his losses are the profits of another bank. According to bloomberg, many of its customers, especially in Asia (including China), flock to Swiss competitor CS:

Over the past three months, UBS Group AG has seen a significant influx of funds into asset management in the Asia-Pacific region from clients leaving Credit Suisse Group AG as its smaller Swiss rival grapples with a crisis of confidence.

Hundreds of wealthy clients have sought to place their funds with UBS in a key growth region, and the bank plans to redeploy staff to handle those growing accounts, people familiar with the matter said.

Andreas Venditti, banking analyst at Bank Vontobel AG in Zurich, described “a huge net outflow of funds in the field of asset management, the main business of CS along with a Swiss bank”, as “a cause for deep concern – especially since they have not yet stopped.” He added that Credit Suisse “needs to restore confidence as quickly as possible, but that’s easier said than done.”

Confidence in the bank’s wealth management department plummeted following the Greenhill debacle, when the bank pumped billions of dollars of client money into deeply opaque supply chain finance funds run by Australian financial engineer Lex Greensill that eventually collapsed. The bank then refused to refund the investors, telling them they would have to wait up to five years for the lawsuit against Greensill to run its course.

As the Australian Financial Review noted in September, “Credit Suisse’s failure to understand the importance of maintaining the image of a financial fortress is bewildering, given that the company sees its future in wealth and asset management.”

3) Its stock has resumed its steep downward trajectory.. Over the past month, Credit Suisse’s share price has continued to fall to new lows despite news that the Saudi ruling family will (indirectly) intervene to stabilize the situation. The stock has lost more than 20% of its value since the end of October – mirroring the drop in SNB shares almost perfectly – and a whopping 58% since the start of the year.

Since Credit Suisse’s stock barely survived the last financial crisis without government bailouts, it has been in a death spiral, losing 95% of its value since 2007. This puts them on a par with Deutsche Bank. For banks, a sharp drop in the value of shares is of particular importance, since equity, along with disclosed reserves and some other assets, constitutes their core capital. Even before the latest capital increase, CS shareholders had already pumped $12.2 billion of additional capital into the lender — $2.2 billion more than its current market value — since 2015.

One of the reasons investors are dumping shares is that even in the best-case scenario proposed in Credit Suisse’s own recovery plan, the bank would be capturing a return on equity – a key measure of profitability – of just 6%. And not before 2025. And that, analysts warn, will put it well below many of its competitors and may not even be enough for the bank to recoup its cost of capital.

In short, not only are wealthy investors fleeing at a speed not seen since the last global financial crisis, but shareholders are once again dumping stocks as fast as they can. If the bleeding continues, it’s only a matter of time before CS needs help and/or a takeover right away from its larger Swiss rival, UBS, to which it is apparently already losing many of its wealthy clients. If this happens, it will create one of the largest, if not the largest, banking monopoly of any major Western economy.