Credit Suisse Crisis: Swiss Central Bank Intervenes

Swiss National Bank offers a loan of up to 50 billion francs to stave off the worst case scenario for the lender

Alliance News 16 March, 2023 | 4:57PM
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Credit Suisse

Under fire Swiss bank Credit Suisse (CSG), whose share price plunged 25% on Wednesday amid concerns over its financial health, has been thrown a lifeline by the Swiss central bank overnight.

Credit Suisse announced on Thursday that it would borrow up to 50 billion francs (£44 billion) from the Swiss central bank to reinforce the group.

In trading on Thursday morning, the bank's share price soared more than 30% to 2.22 Swiss francs before dropping back. The shares closed up just over 19% at SFr2.02.

The disclosure came just hours after the Swiss National Bank said capital and liquidity levels at the lender were adequate for a "systemically important bank", even as it pledged to make liquidity available if needed.

Credit Suisse said the central bank loan of up would "support...core businesses and clients", adding it was also making buyback offers on about $3 billion worth of debt.

"These measures demonstrate decisive action to strengthen Credit Suisse as we continue our strategic transformation to deliver value to our clients and other stakeholders," chief executive Ulrich Koerner said in a statement.

Credit Suisse, hit by a series of management scandals in recent years, saw its stock price tumble off a cliff Wednesday after major shareholder Saudi National Bank said it will not invest more in the group, citing regulatory constraints. Sentiment in the global banking sector is extremely fragile after the collapse of the Silicon Valley Bank and stock prices across the industry have been under pressure since last week.

Morningstar View

Banking Analyst Johann Scholtz says:

The CHF 50bn liquidity injection from the Swiss central bank announced this morning could buy Credit Suisse some precious time to execute a more radical restructuring than it previously envisaged. It has become clear that the current restructuring plan does not go far enough to address the concerns of funders, clients and shareholders. We believe that the key to restoring confidence and ensuring its viability is for Credit Suisse to run down its loss-making securities trading business in an orderly fashion. While we believe the liquidity injection is positive, the situation remains highly fluid, and we keep our fair value estimate and moat rating under review.

The confirmation from Credit Suisse in the announcement that its high-quality liquid assets bond portfolio is fully hedged against interest rate risk is welcome. This should reduce concerns around potential mark-to-market losses of held-to-maturity bonds. Credit Suisse also reiterated that its lending book remains healthy, with 90% comprising secured loans.

Credit Suisse, however, has a profitability problem, not an asset quality problem. Its current restructuring plan is too complex and does not provide enough detail on the future of the investment banking business. Investment banking has been the source of many of Credit Suisse's past woes. Under the current restructuring plan, Credit Suisse will retain the perenially unprofitable securities trading business. The carve-out of some of the more profitable investment banking businesses into a "new" CS First Boston vehicle seems like a cosmetic change, with only vague indications of a potential IPO in the future. We believe a more radical separation of investment banking activities from Credit Suisse is needed to restore confidence. Credit Suisse should run down the securities trading businesses. It should also clarify the ultimate ownership structure of CS First Boston with a clear timeline for an IPO or other disposal.

Despite its current solid common equity tier-one ratio of 14.1%, we believe Credit Suisse would need additional capital to fund the restructuring costs involved in running down unprofitable businesses. As we previously indicated, the disinclination of the Saudi National Bank to provide further capital makes a rights issue challenging. Disposal of some higher quality business units or listing a minority stake in Credit Suisse's profitable and stable Swiss banking business are other avenues to consider.

Which Funds Own Credit Suisse?

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