Why Credit Suisse is on the verge of a crash

Why Credit Suisse is on the verge of a crash

The large losses incurred in the Archegos case plummet Credit Suisse's shares and undermine market confidence in the recovery plan. All the details

Shares in Swiss financial services firm Credit Suisse Group fell 11.5 percent on Monday and its bonds hit record lows. Both are signs that the markets have some doubts about the bank's ability to carry out its restructuring plan without asking for more capital.

An unnamed source told Reuters that Credit Suisse's situation has prompted the Swiss financial market supervisor, FINMA, and the UK Central Bank (the bank has a large office in London) to work together to monitor the situation. situation.

SHARES, LOSSES AND CREDIT DEFAULT SWAPS

The group's shares have lost more than 55 percent since the beginning of the year. Losses, on the other hand, have almost touched $ 4 billion in the past three quarters. Credit default swaps – the instruments used to ensure the lender's debt exposure – went from 57 basis points at the beginning of 2022 to 250 basis points on Monday 3 October.

THE BACKGROUND

Credit Suisse is one of the largest and most important banks in Europe and the world. After suffering a loss of more than $ 5 billion due to the collapse of the Archegos hedge fund in March 2021 – when it defaulted on the repayment requests of Credit Suisse and other institutions -, it had to raise capital, block the repurchase of shares, cut dividends and renew their management.

Also in March 2021, Credit Suisse also had to suspend client funds from Greensill Capital, a bankrupt financial services firm it was partnering with.

NEW STRATEGIC REVIEW AND NEW CEO

Last July, the bank announced a new strategic overhaul – the second within a year – and replaced its chief executive: the current one, Ulrich Koerner, is working on reducing investment banking activity and cutting more than $ 1 billion in costs.

Read also: All the new messes at Credit Suisse

THE TURNAROUND STRATEGY

On October 27, Credit Suisse will present its turnaround strategy, ie recovery and recovery of profitability. Not all experts are convinced that the group has sufficient capital to manage the crisis, also considering the moment of fragility of the financial markets due to the increase in interest rates and fears of an economic recession.

Credit Suisse appears to be aiming to streamline its investment banking unit to expand its wealth management unit, which absorbs less capital. Among the options the bank said it is considering is finding a buyer for its securitized product business.

THE OPINION OF CITI

According to Citi analysts, widening credit spreads could exacerbate market concerns and raise borrowing costs for Credit Suisse. Reuters wrote last month that the bank was probing investors' willingness to lend it money for its review.

KOERNER'S ASSURANCE

A week ago, CEO Koerner's staff expressed assurances about Credit Suisse's liquidity and equity ownership. Yesterday, however, the group's market capitalization fell to $ 9.85 billion, the lowest ever.

THE POSITIVE JUDGMENT OF JPMORGAN

However, JPMorgan analysts consider Credit Suisse's capital and liquidity to be “healthy”.

WILL CREDIT SUISSE HAVE TO SELL ASSETS?

At the end of the second quarter of 2022, Credit Suisse had total assets of $ 735.68 billion (CHF 727 billion); of this, 159 billion francs consisted of cash and receivables from other banks, while 101 billion francs were trading assets.

According to Jefferies, Credit Suisse is now potentially a forced seller of assets. In August, Deutsche Bank had estimated a capital shortfall of at least CHF 4 billion for Credit Suisse.


This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/credit-suisse-crollo-azioni-strategia-risanamento/ on Tue, 04 Oct 2022 08:15:44 +0000.