Idiosyncratic or wider bank issue?
The negative headlines for Credit Suisse continued this morning, when they really need to stay out of the spotlight and rebuild some credibility. Unfortunately, situations like this can fast become self-fulfilling and every negative story in the media can have an adverse effect.
To recap, since CS announced their 3-year restructuring plan, and carried out a successful capital raise, there have been a number of negative stories; this includes a probe into the claim by the Chairman, Axel Lehmann, that outflows had ceased – this probe has since then been closed without any action; a report by FINMA, the Swiss regulator, highlighting a serious breach of supervisory obligations relating to Greensill – this probe was backward looking and has also been closed; a technical delay to the release of their FY 2022 results driven by the SEC (due to a technical question surrounding the 2019 and 2020 results) – the results were subsequently released yesterday; and lastly, their statement yesterday that: “material weakness in our internal control over financial reporting” relating to 2021 and 2022 – although obviously serious, it’s also arguably backward looking and has not resulted in a restatement of any earning releases. These are not issues you can make light off, but we would argue they were mostly relating to the very poor governance and risk controls in place at CS, which has led them to their current vulnerable position, and which the current management are working hard to remedy.
Unfortunately for CS, the timing of these releases, came not when markets were pausing from the strong rally in bank debt, since the start of October, but coincided with the collapse of Silicon Valley Bank (SVB) and a number of regional US banks, which has caused contagion across global financials. There are very few parallels between the large European banks and SVB, and in particular the treatment of, and holding of, long dated government bonds is very different. Regarding CS specifically, the bank stated yesterday that its fixed rate exposure is limited to just CHF2.5bn in the liquidity book, all of which is fully hedged. This echoes what we are hearing from other European banks and isn’t at all surprising given the high level of regulation in Europe.
The latest negative headlines came this morning from Ammar Al Khudairy, the chairman of the largest equity holder in CS, the Saudi National Bank (SNB), when answering whether the SNB would provide more assistance said: “The answer is absolutely not, for many reasons outside the simplest reason, which is regulatory and statutory”. Given the SNB holds 9.9% of the shares, this should not be a surprise to anyone, and Al Khudairy added: “If we go above 10%, all new rules kick in whether it be by our regulator or the Swiss regulator or the European regulator”. Other comments, that weren’t reported as broadly, include: "I don't think they will need extra money….if you look at their ratios, they're fine. And they operate under a strong regulatory regime in Switzerland and in other countries" and "We are happy with the plan, the transformation plan that they have put forward. It is a very strong bank".
Immediately the SNB comments were highlighted in the media as investors reacted in a very negative manner resulting in the equity falling by 20% and ultimately a halt to trading. From here, we think the CS management are going to find it difficult to calm investors and deposit holders, and we’d imagine that the Swiss National Bank and Swiss regulator, FINMA, are in very close contact with them. Ultimately, they need time for their restructuring plan to take shape, but deposit flows are likely to be the key determinant of how successful they are. The bank has just reported a CET1 ratio of 14.1%, so they are highly capitalised and their average liquidity ratio (LCR) was 150% in Q1 2023, but these stats seem somewhat meaningless in the situation they find themselves, which is about liquidity and confidence, or a lack thereof.
If the Swiss National Bank/FINMA do intervene, a liquidity line would seem the obvious first step, if indeed CS are seeing outflows. In addition, some assets could be taken off balance sheet – something we saw happen at various banks during the global financial crisis, and in this case, we’d expect the assets to be of much higher quality than what was being dealt with back then.
This support could give CS the time they need, but the situation is very fluid at the moment, and given the negative sentiment driven by the US regional banks, timing could scarcely be worse.