Credit Suisse not out of the woods yet despite SNB lifeline

Shares of Credit Suisse Group AG (SWX:CSGN) soared on the SIX Swiss Exchange on Thursday after the embattled bank said it will exercise its option to borrow CHF50 billion ($54 billion) from the Swiss National Bank (SNB), the central bank of Switzerland.

The decision has been later confirmed by the SNB and the Swiss Financial Market Supervisory Authority (FINMA) as Credit Suisse fulfills the “capital and liquidity requirements imposed on systemically important banks.”

The troubled lender also made a tender offer to repurchase up to 3 billion Swiss francs’ worth of dollar- and euro-denominated 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,” Credit Suisse CEO Ulrich Koerner said in the press release.

Credit Suisse’s years-long struggles continue

On Tuesday, Credit Suisse disclosed a “material weakness” in its delayed annual report, relating to its financial statements for 2021 and 2022. The annual report was scheduled for release on March 9 but got delayed following a late call from the U.S. Securities and Exchange Commission (SEC).

Late last year, Credit Suisse said it discovered notably higher cash deposit withdrawals, “non-renewal of maturing time deposits and net asset outflows at levels that substantially exceeded the rates incurred in the third quarter of 2022.”

In Q4 2022, the Swiss banking giant faced customer withdrawals of over 110 billion CHF amid a litany of scandals, legacy risks, and compliance failures. The reported material flaws were not the end of Credit Suisse’s woes this week.

On Wednesday, the lender’s key backer - Saudi National Bank - triggered an even bigger selloff after telling Bloomberg it would “absolutely” not be able to continue providing financial aid to the Swiss lender due to regulatory challenges.

The remarks sent the bank’s stock to a new all-time low for a second consecutive day this week. Trading in Credit Suisse’s nosediving shares was halted multiple times on various stock brokerages Wednesday morning as it dropped below 2 Swiss francs ($2.17) for the first time ever.

Its Swiss-listed shares ended the trading session down 24%, while the U.S.-traded American depositary receipts closed at 15% in the red.

“We cannot because we would go above 10%. It’s a regulatory issue,” said Ammar Al Khudairy, Chairman of Saudi National Bank. On the other hand, SNB is happy with Credit Suisse’s turnover plan and signaled that the Swiss bank was unlikely to need further financial assistance.

SNB, the largest commercial bank in Saudi Arabia, bought a 9.9% stake in Credit Suisse in 2022 as part of its $4.2 billion capital raise aimed at fueling a significant strategic transformation in an effort to prop up its investment banking operations and address risk and compliance issues.

Credit Suisse CEO Ulrich Koerner tried to reassure investors that the bank’s liquidity basis remains “very strong” and that the bank meets and exceeds “all regulatory requirements.”

The support from the Swiss central bank has bought Credit Suisse some more time to regain investors’ trust which has been battered over the past year. The move aims to stop a crisis of confidence in Credit Suisse from deepening further and preventing a complete collapse.

It also makes Credit Suisse the first globally systemically major bank to receive a bespoke lifeline since the 2007-2008 global financial crisis.

A new global banking crisis?

The announcement provided a much-needed boost for the bank’s stock following a days-long slide amid banking turmoil triggered by the collapse of the Silicon Valley Bank (NASDAQ:SIVB) last week.

Credit Suisse’s fight for survival has become even more difficult following the SVB fallout that economists described as the biggest banking failure in 15 years. The bank was closed by U.S. regulators last week after a major run on its deposits.

Credit Suisse’s massive stock price decline led to a broader sell-off in European lenders, which were already under pressure due to the SVB fiasco. France’s Societe Generale, Spain’s Banco de Sabadell, and Germany’s Commerzbank saw the biggest declines on Wednesday, while multiple Italian banks such as UniCredit, FinecoBank, and Monte Dei Paschi, faced trading halts.

While the SNB’s lifeline helps the bank stay afloat, it does not resolve the bank’s strategic issues nor its inability to recover investor confidence. The historic bank has been attempting to hit profitability again by shifting away from investment banking and trading securities to concentrate on wealth management.

Credit Suisse’s revenue from trading stocks and bonds plunged by 88% in the last quarter of 2022 compared to a year earlier, partly because its clients moved their business somewhere else.

"The Swiss authorities will probably want to keep it on life support because of national symbolism," said Thomas Hayes, chairman and managing member of Great Hill Capital.

"They’re going to prop this thing up and walk it around like its alive, but it will basically be a zombie bank that’s state controlled."

Summary

Credit Suisse shares are trading higher on Thursday after the Swiss central bank decided to shore up liquidity with a CHF50 billion lifeline. The SNB’s decision to back Credit Suisse leaves the central bank on the hook if confidence in the lender continues to decline. Shares previously plummeted to a fresh record low on liquidity concerns.

In the meantime, the embattled bank must resume the radical overhaul it announced in October to recover profitability. A rival bank acquiring Credit Suisse is also not ruled out by bank analysts at this stage.