Credit Suisse CSGKF shares climbed Thursday after the Swiss central bank launched a rescue plan that appeared aimed not just at shoring up investor confidence in the bank itself, but buying the deteriorating global financial services company some time to find buyers.
Credit Suisse is still thought to be losing clients and deposits despite the Swiss central bank’s commitment to provide it with massive amounts of emergency liquidity. Its credit default swaps, a form of bond default insurance, remained at distress levels even though their prices fell Thursday. JPMorgan analysts said in a note that the status quo at Credit Suisse “was no longer an option” and that the “option of a takeover [is] the most likely scenario.”
Switzerland’s largest bank, UBS Group UBS-N, is reportedly seen as a possible buyer of some parts of Credit Suisse, likely the Swiss banking unit itself. Canada’s financially sound and expansion-minded banks are also considered contenders. The sale of some or all of the bank could be announced by next week, according to executives who are close to Credit Suisse.
Shares of Credit Suisse Group AG opened 40 per cent higher on the Swiss stock exchange – their biggest jump on record. Investors later tempered their enthusiasm as they took the view that the bank has some hard decisions to make in the next few days to protect what remains of its global franchise. The shares closed up 19 per cent but failed to recoup the week’s horrific losses.
The share rebound came after an extraordinary series of events, culminating in a 2 a.m. Thursday announcement that Credit Suisse would boost its liquidity position by borrowing as much as 50 billion Swiss francs (73.8-billion) from the Swiss National Bank under a covered loan facility and short-term liquidity facility, both backed by high-quality collateral.
Six hours earlier, the central bank had said in a statement that it would, “if necessary,” provide Credit Suisse with ample liquidity. When it became apparent that the reassurances were not enough to prevent further deterioration – and a possible bank run – Credit Suisse went to the next step and implemented the emergency borrowing.
Credit Suisse, a lender, investment bank and private bank that once was once among the world’s most prominent financial services players, had plenty of assets that could be sold to shore up liquidity. But those sales would not have been quick, and the bank had no time to spare as its shares plummeted, triggering a confidence crisis among investors in markets already battered by the collapse a few days earlier of California’s Silicon Valley Bank.
“Credit Suisse is a million miles away from Silicon Valley Bank,” said Megan Greene, global chief economist at the Kroll Institute, in an interview with The Globe and Mail on Thursday. “It has very healthy levels of liquid assets should they be needed, access to a string of central bank facilities and less sensitivity to sharp moves in interest rates than many rivals. What matters now is whether the bank can weather this storm without a crisis of faith overtaking the fundamentals of its balance sheet, which are still sound.”
Credit Suisse also announced plans to buy back some of its beaten-up debt. It will make a cash tender offer for U.S.-dollar senior debt securities worth as much as US$2.5-billion and euro-denominated senior debt securities worth as much as €500-million. Those offers will expire March 22.
In a statement, Credit Suisse chief executive Ulrich Koerner, who was appointed last summer, said: “These measures demonstrate decisive action to strengthen Credit Suisse as we continue our strategic transformation … My team and I are resolved to move forward rapidly to deliver a simpler and more focused bank.”
He gave no details of how Credit Suisse would be refocused, though it is an open secret that it is considering purchase proposals.
Credit Suisse is a complicated bank, holding a diverse range of businesses inside and beyond Switzerland. The Swiss bank itself, made up of a retail bank and a private bank, is considered the gem of the overall business. Revenues for the Swiss bank fell about 10 per cent last year but still accounted for one-third of overall revenues. The Financial Times reported Thursday that the Swiss banking unit is conservatively worth nine billion Swiss francs – more than the value of all of Credit Suisse.
The other main businesses are an international private bank and the U.S. investment bank, Credit Suisse First Boston, which the bank wants to carve out. Earlier this week, Mr. Koerner told Bloomberg TV: “We have a very clear plan to put [CSFB] into market, creating a liquidity event, most likely an [initial public offering] and expect such an event in 2025.”
Executives who know Credit Suisse say the Canadian banks should not be ruled out as contenders for the international private bank or CSFB. Toronto-Dominion Bank and Bank of Montreal have been bulking up south of the border and may want more. Royal Bank of Canada knows Credit Suisse well. In December, RBC was one of the lead underwriters of the Credit Suisse rights issue that raised about 2.3 billion Swiss francs.
But buying a division of a Swiss bank could be a stretch, as these Canadian banks have already made massive deals to scoop up U.S. firms. BMO is integrating its purchase of California-based Bank of the West, while TD focuses on two deals that expand its investment banking and retail presence south of the border. And RBC plans to buy HSBC Canada in the biggest domestic banking deal on record.
Meanwhile, Canada’s banking regulator has ramped up capital requirements, forcing banks to hold onto extra funds as a cushion against a potential economic downturn. That would take a chunk out of the money that banks could put to work on acquisitions.
While the shares of scandal-ridden Credit Suisse have been losing ground for at least five years, the bank went into crisis mode early this week, as many big banks’ bond portfolios were suffering damage from rising interest rates. Credit Suisse’s assets under management fell 27 per cent last year. The bank’s deposits fell 37 per cent in the fourth quarter alone.
On Tuesday, the bank reported that PwC, its auditor, had found “material weaknesses” in its financial reporting controls. The next day, Saudi National Bank chairman Ammar Alkhudairy said his bank would “absolutely not” provide extra capital to Credit Suisse. The Saudi bank had bought 10 per cent of Credit Suisse last year and saw the value of that investment steadily deteriorate.
That revelation pushed down Credit Suisse shares by 24 per cent Wednesday. Despite Thursday’s rebound, the shares are still down 72 per cent in one year, giving the bank a market value of less than seven billion Swiss francs.