- UBS is eyeing a potential takeover of Credit Suisse in an effort to prevent the bank’s collapse.
- Credit Suisse shares tumbled more than 25% on Wednesday as fears grew of a banking crisis.
- Here’s a closer look at why Credit Suisse is worrying investors.
UBS is eyeing a takeover of Credit Suisse, after shares tumbled more than 25% to a record low this week upon news that the banking giant’s biggest shareholder said it won’t provide any more financial help. The timing couldn’t be worse as investor fears mount that recent pressure on banks could herald another financial crisis, following the collapse of Silicon Valley Bank.
The prospective deal between Switzerland’s two biggest banks was brokered by the Swiss National Bank and regulators in an effort to shore up confidence for the country’s financial institutions, the Financial Times reported on Friday. Deutsche Bank is also reportedly considering acquiring parts of Credit Suisse, sources close to the matter told Bloomberg on Saturday.
Presented below is a closer look at the European lender’s troubles, and why it’s now fending off questions about its stability and it looks to reach a deal before markets open Monday.
Why is Credit Suisse under fire right now?
Credit Suisse shares tanked Wednesday after its biggest shareholder, Saudi National Bank, warned it wouldn’t be able to invest more cash without raising its stake above the regulatory limit of 10%.
Fallout from the comments hit the shares of Deutsche Bank, UBS, and its other European peers. Credit Suisse CEO Ulrich Koerner has also faced questions about his plans to cut costs, staunch losses, and turn around his company.
But investors were showing signs of losing faith long before the Saudi comments, and before the SVB collapse rattled the entire banking industry.
Harris Associates, Credit Suisse’s No. 1 investor as recently as last year, exited its entire stake in the embattled Swiss bank over the past few months. The Chicago-based investment management firm owned about 10% of the Swiss bank’s stock as of August last year, but slashed its exposure to 5% in January. More recently, Harris reportedly cut its holdings in the lender to zero.
“There is a question about the future of the franchise. There have been large outflows from wealth management,” David Herro, Harris Associates’ deputy chairman and chief investment officer, was cited by the Financial Times as saying, in a March 5 report.
SNB’s chair, Ammar al-Khudairy, told Reuters that he doesn’t see the Saudi bank’s stated lack of support as a problem.
“I don’t think they will need extra money; if you look at their ratios, they’re fine,” he said, referring to standard measures of a bank’s financial health.
“We are happy with the plan, the transformation plan that they have put forward. It is a very strong bank,” he added, noting Credit Suisse operates under a strong regulatory regime in Switzerland and other countries.
Still, Credit Suisse has faced a slew of other recent challenges. The bank revealed in its latest annual report that it found “material weaknesses” in its internal control over its financial reporting. Moreover, it delayed publishing that annual report after the Securities and Exchange Commission inquired about the lender’s revisions to cash flow statements dating back to 2019.
Credit Suisse also suffered a net loss of about $8 billion last year, as its net revenues tanked by more than a third. Moreover, it has seen a sharp increase in outflows over the past few months, driving it to tap its “liquidity buffers” — liquid assets such as central-bank reserves and high-quality government debt.
Is a banking crisis brewing?
The latest slump in Credit Suisse stock can also be partly explained by recent events in the US banking industry.
Silvergate, a key lender to the cryptocurrency industry, announced it was winding down its operations and liquidating its assets last Wednesday.
Silicon Valley Bank, a major player in the venture-capital ecosystem, was overwhelmed by a wave of withdrawals and taken over by the Federal Deposit Insurance Corporation (FDIC) on Friday.
The FDIC revealed on Sunday it had taken control of Signature Bank as well. Moreover, it announced that under a “systemic risk exception,” it would fully guarantee both banks’ deposits, beyond the usual limit of $250,000 per account.
SVB ran into trouble because it invested some of its clients’ deposits in long-dated bonds. Those plunged in price as the Federal Reserve hiked interest rates from nearly zero to upwards of 4.5% over the past 12 months in response to inflation hitting 40-year highs.
The lender sold its bond portfolio at a nearly $2 billion loss last week, and launched a capital raise to reinforce its finances. Its scramble for cash stoked concerns about SVB’s stability among VCs and their portfolio companies, sparking a wave of withdrawals that overwhelmed the bank and spurred the FDIC to intervene.
SVB’s collapse has fueled worries that other banks are carrying heavy losses on their bond portfolios, as rates have jumped in both the US and Europe.
Investors may also be bracing for further bank runs that could topple lenders, especially as a one-two punch of historic inflation and soaring rates squeezes consumers and businesses, and companies brace for a potential global recession.
Credit Suisse bond risk is rising
There appears to be growing concern that Credit Suisse might default on its debts, based on the soaring cost of insuring the bank’s bonds. Traders saw prices on one-year senior credit-default swaps as high as 1,200 basis points on Wednesday, making them several times more expensive than other banks’ CDs, Bloomberg reported.
Both Michael Burry of “The Big Short” fame, and billionaire investor John Paulson, used CDs to short the mid-2000s housing bubble that preceded the financial crisis. Moreover, a key moment at the start of the Great Recession was the collapse of Lehman Brothers, one of the largest US investment banks.
In an effort to combat a collapse, UBS is considering a takeover of Credit Suisse, the Financial Times reported on Friday. According to the outlet, regulators said a merger between the two banks is their “plan A” leading into markets opening Monday, though it remains uncertain if the deal will go through.
Meanwhile, Deutsche Bank is also eyeing parts of the Credit Suisse business, Bloomberg reported on Saturday. Sources close to the matter told the outlet that the bank is discussing potential acquisitions but it has made no official proposals.
There’s no clear reason to believe Credit Suisse is at risk of failure. But its checkered past, plunging stock, soaring CDs prices, the recent string of bank failures, and previous cases of lenders collapsing with massive repercussions, appear to be worrying some investors greatly.
A slew of scandals
Here’s a quick summary of the controversies that have plagued Credit Suisse in recent years:
- The bank hired private detectives to spy on former executives, leading to the departure of its CEO in February 2020.
- It lost nearly $6 billion in March 2021 after Archeges Capital Management imploded and defaulted on its loans from the Swiss lender.
- It’s still working to recover about $2 billion of the roughly $10 billion it had tied up in supply chain finance funds linked to Greensill, which collapsed amid allegations of fraud in March 2021.
- It was fined for making fraudulent loans dubbed “tuna bonds” to Mozambique’s government between 2012 and 2016.
- Its chairman was forced to resign in January after an internal investigation found he violated COVID-19 quarantine rules to attend Wimbledon.
- Credit Suisse’s previous CEO resigned for personal and health reasons last July.