Credit Suisse is not out of the woods just yet.
Shares in the Swiss lender fell by as much as 12% Friday, erasing most of Thursday’s gains, as investors feared that a $54 billion lifeline from the Swiss central bank might not be enough to rescue the beleaguered bank.
By comparison, Europe’s benchmark Stoxx Europe 600 Banks index, which tracks 42 big EU and UK lenders, fell by a more modest 3% by mid-afternoon.
Stefan Legge, an economics lecturer at the Swiss-based University of St. Gallen, told CNN that Credit Suisse’s problems ran particularly deep because of multiple hits to its reputation.
“A bank, more than any other business, requires trust from its customers, and that trust, that reputation, has been damaged time and time again,” Legge said. “There’s a point when it breaks.”
Credit Suisse has lost a third of its stock market value since the start of the year, and nearly 75% in the past 12 months, following a string of scandals and bad calls by management that have eroded investors’ confidence.
Customers have voted with their feet, withdrawing 123 billion Swiss francs ($133 billion) from Credit Suisse in 2022, mostly in the fourth quarter. Last month, the bank reported an annual net loss of nearly 7.3 billion Swiss francs ($7.9 billion), its biggest since the global financial crisis in 2008.
Investors have also been ditching Credit Suisse’s funds this week. European and US funds managed by the bank reported more than $450 million in net outflows between Monday and Wednesday, according to Morningstar Direct data on open-end and exchange-traded funds.
The bank’s stock has fallen particularly sharply since Monday, after the collapse of US lenders Silicon Valley Bank and Signature Bank set alarm bells ringing about banks in other markets.
On Wednesday, Credit Suisse shares crashed as much as 30% to hit $1.55 apiece, a new record low.
The stock rebounded 19% Thursday following the bank’s announcement that it would borrow 50 billion Swiss francs ($53.7 billion) from the Swiss central bank “to pre-emptively strengthen its liquidity.”
What now?
According to JP Morgan’s banking analysts, the bumper liquidity injection from the Swiss National Bank is not enough to keep the bank afloat. In a note on Thursday, they wrote that they saw a takeover by fellow Swiss lender UBS as the most likely endgame.
Under this scenario, UBS would likely spin off Credit Suisse’s Swiss business since the two banks’ combined market share would make up about 30% of Switzerland’s domestic banking market and mean “too much concentration risk and market share control.”
There are two other paths Credit Suisse could take, the analysts wrote, though they are less likely.
Firstly, the bank could shutter its investment bank division and raise equity through a partial IPO of its domestic business.
Secondly, the Swiss National Bank could fully guarantee all deposits for Credit Suisse’s customers, or buy a portion of its stock. Both options would give the bank enough time to restructure, according to the analysts, but would likely be unpopular as they would require taxpayer funds.
Credit Suisse could also consider offering more shares to existing shareholders, according to Johann Scholtz, equity analyst at Morningstar. Although the move would dilute the value of its stock, it would raise vital capital, he wrote in a note Friday.
“Credit Suisse’s liquidity position seems adequate to handle deposit outflows, and it should also be able to obtain emergency liquidity from the Swiss National Bank,” he said.
“This does, however, not solve Credit Suisse’s profitability challenge, nor does it address capital concerns.”
Credit Suisse will be holding meetings over the weekend to assess scenarios for the bank, Reuters reported, citing people with knowledge of the matter.
Fears over the bank’s future have also hit its debt. One of the lender’s bonds, which matures next month, fell 3% Friday, to trade at 92% of face value.
Bondholders are concerned about the bank’s ability to make good on its promise to pay them back. The cost of buying derivatives that insure against the risk of default by the bank — known as a credit default swap — surged to an all-time high Wednesday.
