Credit Suisse at centre of renewed bank sell-off
The bonds and CDS of Credit Suisse were hammered in the secondary market on Wednesday as its stock price plummeted after its largest shareholder said it could not increase its stake in the bank.
The bank's CDS curve heavily inverted on Wednesday, with spreads hitting new record highs, while its bonds were also hit hard in the secondary market. Credit Suisse's shares fell by as much as 30% on Wednesday after its largest investor, Saudi National Bank, said it could not increase its stake in the Swiss lender for regulatory reasons, as that would lift its holding above 10%.
It meant that the sense of calm at the European open, and optimism that bank stocks could begin to recover, proved short-lived, with Credit Suisse's woes dragging down Europe's Stoxx banking index by 7%. Other major European lenders also suffered, with Societe Generale's shares down by more than 12%, BNP Paribas' by almost 11% and Commerzbank's by almost 10%.
The renewed rout added to a torrid week for banks globally, after the collapse of specialist US lender Silicon Valley Bank last week triggered a huge sell-off and raised concern about risks and vulnerabilities to rising rates hidden in lenders' balance sheets. Bankers and investors have stressed that European lenders are well protected against the kind of crisis that befell SVB, thanks to their more diverse deposit bases, generally strong capital and liquidity positions, and rigorous regulation, but it was a European lender at the heart of the latest sell-off.
The cash price of Credit Suisse's US$1.65bn 9.75% perpetual non-call June 2027s, its most recently issued AT1, plummeted from 72.30 at Wednesday's open to 30.20 by late Wednesday afternoon, while its yield-to-call rose from 18.7% to 48.2%, according to Tradweb figures. The deal had been bid at a cash price of 86.50 and a yield-to-call of 13.7% before the sell-off triggered by SVB's collapse.
The bank's senior unsecured bonds were meanwhile marked many hundreds of basis points wider in some cases. The most recent senior issue, a 5.5% €750m August 2026 transaction sold on February 15, was marked 393bp wider on Wednesday, going from a bid spread of 378bp at the open to 771bp, for example.
Other banks' credit was also marked wider, as was made apparent in indices. The iTraxx financials senior index widened by more than 20bp, while the iTraxx financials subordinated index widened by more than 38bp.
Even before Wednesday's headlines, Credit Suisse had been hit particularly hard by the SVB-inspired sell-off. The lingering impact of a series of scandals over recent years has made the bank especially susceptible to turns in sentiment.
The bank is in the middle of a major restructuring and battling to return to profitability. In the fourth quarter of last year, it witnessed outflows of some SFr110bn (US$120bn) – although chief executive Ulrich Koerner on Tuesday reiterated that outflows have stabilised.
The bank was also forced to delay publication of its annual report earlier this month, following concerns from US regulator the Securities and Exchange Commission, prompting the bank to qualify its accounts for the last few years and state there were "material weaknesses" in its internal controls.
Analysts highlighted as a positive that Credit Suisse's liquidity coverage ratio, after falling from 203% to 144% in 2022 due to deposit outflows, had increased to 150% in the first quarter of 2023 on an average basis, according to Koerner. Analysts have also highlighted throughout the bank's recent struggles that its capital levels are above the average for European banks and well in excess of minimum requirements.
Paul van der Westhuizen, senior financials analyst at Rabobank, wrote in a research note that while Credit Suisse appears in a decent position, based on such metrics, the bank is likely to come under further pressure as losses pile up and its funding costs rise further.
"With one-year credit default swap spreads currently over 800bp, access to the primary market might be very tough going forward," he said.
Another 'idiosyncratic case'?
Van der Westhuizen said that, should Credit Suisse be given the time and space to execute its restructuring plan, then there should be a path back to profitability, but noted the situation is currently fluid. He said the backdrop is not working in its favour and the market "smells blood".
Reuters reported on Wednesday afternoon that European Central Bank officials have contacted lenders it supervises to ask about financial exposures to Credit Suisse
Andrew Kenningham, chief Europe economist at Capital Economics, said that due to the size and global connections of Credit Suisse, it is in principle a much bigger concern for the global economy than the regional US banks in the line of fire line last week. He said the bank's problems "once more raise the question whether this is the beginning of a global crisis or just another 'idiosyncratic' case".
"Credit Suisse was widely seen as the weakest link among Europe’s large banks, but it is not the only bank which has struggled with weak profitability in recent years," he wrote.
"Moreover, this is the third 'one-off' problem in a few months, following the UK’s Gilt market crisis in September and the US regional bank failures last week, so it would be foolish to assume there will be no other problems coming down the road."