Silicon Valley bank recession has pushed the world’s most troubled systemic lender, Credit Suisse, closer to the edge

As the wave of contagion from the collapse of Silicon Valley Bank and Signature Bank spreads, one European bank is particularly vulnerable. And despite having lost over 95% of its market value since 2008, it is still too big to collapse.

Shares of Credit Suisse Group AG, the world’s most troubled systemic lender, fell as much as 15% on Monday (March 13) to a new record low before rebounding slightly in late trading hours. Today (12:00 CET, March 14) they are down another 4%. This latest crisis of confidence in global banking has also caused a new surge in the cost of insuring CS bonds against default. Five-year credit default swaps on CS debt rose to a new record of 453 basis points on Monday. It was the widest stroke of 125 European high-end companies tracked by Bloomberg.

The panic caused by the collapse of Silicon Valley Bank and Signature Bank exacerbated concerns about Credit Suisse’s ability to restructure its business, raise new customer funds (to close a gaping gap left by last year’s historic exodus), revive its investment banking business, and deal with current legal and regulatory issues. These fears were exacerbated tolerance from a lender due to the delay in publishing its annual report on Tuesday that “management has not developed and maintained an effective risk assessment process to identify and analyze the risk of material misstatement in its financial statements.”

It’s happening on the heels last week’s news that the Swiss lender delayed the release of its 2022 annual report after a “late call” on Wednesday evening from the U.S. Securities and Exchange Commission. The call appears to have been “in connection with some of the SEC’s public comments on the technical evaluation of previously disclosed changes to the consolidated cash flow statements for the years ended December 31, 2020 and 2019, and related controls.” None of this, of course, inspires confidence.

Middle East connection

Shares in most European banks have fallen since Friday, but few have fallen as much as Credit Suisse. The one rare exception was Germany’s Commerzbank, which has been in trouble for years, closing down 12% on Monday. But today Commerzbank, unlike CS, though slightly, is in the black. CS shares are down 26% since the start of the year, down from 67% last year.

For banks, a sharp drop in the value of shares is important, since equity, along with disclosed reserves and some other assets, constitutes their Tier 1 capital. Since Credit Suisse shares barely survived the last financial crisis without government bailouts, they have been in a death spiral, losing more than 95% of their value since 2007. Bank shareholders already poured about $16.5 billion of additional capital into the bank since 2015, including $4.3 billion of new capital raised in October. This is almost double its current market value ($9.41 billion).

As part of the latest rights issue, the Saudi National Bank (SNB), controlled by the House of Saud, bought a 9.9% stake, making it the new largest shareholder of Credit Suisse. It also marked a further increase in the influence of the Middle East on the bank. Prior to investments by SNB, Olayan Group (4.9%) and Qatar Investment Authority (5%). there have been bids in the lender.

The usual North Carolina Colonel Smithers has previously argued that the Kingdom may be trying to replicate what UBS has done for Singapore by partnering with local firms, educating local residents and building wealth management systems. But SNB shareholders are already paying a high price for the investment. Since the announcement of interest in acquiring a stake in CS in October, SNB shares have fallen by about a third.

“Big outflows from money management”

Just days before the collapse of Silicon Valley Bank, the former largest shareholder of CS, Harris Associates, announced he sold all his shares in the creditor. In August 2022, the Chicago-based firm held 10.1% of all Credit Suisse shares but was reducing its stake as the scale of CS’s problems became apparent.

“There is a question about the future of the franchise,” Harris Vice Chairman David Herro told the FT. “There were big outflows from money management.”

Since the beginning of last year, Credit Suisse has been suffering from a run on deposits. In total, clients withdrew 111 billion Swiss francs ($121 billion) from the lender – a significant amount of money even for a TBTF lender! Ass Reuters informed in February, attempts by the bank’s management to hide this fact further undermined investors’ confidence in the lender.

In an interview with Bloomberg on December 10. On November 2, Axel Lehmann, the sadly appointed chairman of Credit Suisse, said that the outflow of deposits “virtually stopped” after the bank reported on November 11. 23 loss of 84 billion francs (90.8 billion dollars) of client assets. It was a blatant lie: by the end of the quarter, the figure rose to 111 billion francs, which suggests that the outflow has indeed accelerated. This prompted Swiss financial market regulator Finma to investigate whether Lehmann was misleading investors. Good Friday, Finma announced that “does not see sufficient grounds for opening supervisory proceedings.” No surprises.

But that has hardly convinced Credit Suisse’s core clientele – wealthy individuals and businesses – that the bank is a safe or sensible place to put their money, especially given renewed turbulence in international financial markets. Also not the last recognition of the bank in its annual report is that the outflow of deposits continues, albeit at a slower pace. It is also not a fact that CS posted its fifth consecutive quarterly loss of $1.5 billion in the fourth quarter of 2022, bringing the bank’s total net loss for the entire year to 7.3 billion francs ($7.9 billion) .

This is slightly less than the net loss for all of 2008 of $8.9 billion. The bank expects further losses this year.

“We have many other investment options,” said David Herro of Harris Associates. “Rising interest rates mean that many European finances are moving in the other direction. Why do something that burns capital when the rest of the sector is now generating it? At least that was the case before the collapse of SVB.

Unsustainable trends

Credit Suisse is not just losing investors; he is also losing customers. None of these trends can last long.

In a desperate bid to win back deposits, the bank is reportedly offering significantly higher deposit rates than its competitors to raise new funds from wealthy customers in Asia. From Reuters:

The bank is offering a 6.5 percent annual rate on new three-month deposits of $5 million or more, three people said, who declined to be named because they are not authorized to speak to the media. The deposit rate was first reported by Bloomberg on Thursday (March 2).

Sources told Reuters that Credit Suisse is also offering a rate of up to 7 percent on annual deposits.

Offers are about 100-200 basis points higher than those of major competitors in the region such as JPMorgan, UBS and Citigroup, two sources and a senior asset manager said.

Surprisingly, new deposit rates are believed to be higher than actual CS lending rates in Asia, raising serious concerns about how the bank can sustain such a funding shortfall. The offers are valid until the end of March and only apply to new cash deposits, not existing portfolios, according to one of Reuters’ sources. The total assets of Credit Suisse’s asset management division fell by a third last year, from 742.6 billion francs to 540.5 billion francs.

This strategy is a reflection of the sheer desperation that gripped the bank as it struggled to deal with the biggest existential crisis in its 167 years of existence. And let’s not forget that this crisis was almost entirely self-caused. In just two years, he went from a fairly savvy money manager to Europe’s most troubled lender from Deutsche Bank, largely due to his over-entanglement in the collapse of the Archegos “family office” and the Greensill “supply chain finance” scam. .

As readers already know, Credit Suisse’s critical asset management arm was shattered in the aftermath of the Greensill fiasco, when the bank pumped billions of dollars of client money into deeply opaque supply chain finance funds 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.

This crisis began in March 2021. A few weeks later, CS suffered another big blow, this time due to exposure from American hedge fund Archegos Capital. While other banks offering primary brokerage services to Archegos, including even Deutsche Bank, quickly liquidated billions of dollars worth of options on which Archegos held after the hedge fund failed to meet a margin call, CS was caught by surprise. As a result, the bank suffered a loss of $4.7 billion. And his hard-earned reputation for risk management was undermined.

Since then Credit Suisse was accused failure to stop a Bulgarian criminal group from laundering money related to cocaine trafficking. After that, data on more than 30,000 CS client accounts containing more than 100 billion Swiss francs. leaked in a German newspaper Süddeutsche Zeitungrevealing some rather dubious identities among account holders.

CS already experienced a mini-financial crisis last October when one or more of its divisions breached liquidity requirements as a result of depositors withdrawing their money. In other words, the bank suffered from the onset of a bank run. According to statement The CS withdrawal was due to “negative press and social media coverage based on false rumors” (that the bank is in trouble, which it clearly is). CS stressed that its group-level liquidity and funding ratios have been consistently maintained.

In my latest article on this topic almost four months ago, I noted that if CS is losing contributors and investors at a rapid rate, it’s only a matter of time before CS needs a bailout and/or a takeover by shotgun from its larger Swiss competitor, UBS, to which it is already losing many wealthy clients. Since then, the bank’s shares have only been falling, and the outflow of deposits continues. Now, as the swift fallout from two California bank runs threatens to further undermine what little confidence remains in the global banking system, it’s even harder to see how that fate can be avoided.

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