Credit Suisse shares fell to an all-time low on Monday, its AT1 bonds tumbled and the cost of insuring against default rose as investors continued to fret about the Swiss bank's health despite attempts by executives to reassure investors and staff.
Pressure is building ahead of the release of a major strategic review from chief executive Ulrich Koerner, which is due on October 27. Koerner is expected to further shrink the investment bank and could sell units or assets, or even spin off its advisory and capital markets arm. Shares have also been pressured by concern the bank could have to tap investors for cash to pay for any restructuring.
Koerner tried to reassure staff in a memo on Friday that despite "noise in the markets and the press between now and the end of October" they should remain disciplined and stay close to clients. He said it was understandable that clients and staff would have questions about strategy, but he said they should not confuse the weak share price "with the strong capital base and liquidity position of the bank".
That was echoed in some "talking points" sent to staff on Sunday to help them try to reassure investors and clients. It said a widening of CDS spreads should not be mistaken for issues related to its capital or liquidity position, according to a copy seen by IFR. It said the bank's CET1 ratio was robust at 13.5% at the end of June, as was its leverage ratio of 6.1% and its total loss-absorbing capacity at SFr96.9bn (US$98.7bn), which exceeded requirements in Switzerland.
Koerner's memo did not provide any clues on the strategic review, and told staff to wait until October 27.
Credit Suisse shares slumped more than 10% early on Monday to SFr3.52, eclipsing the SFr3.70 low they hit on Wednesday. By 1:30pm in London the shares were down 7.1% at SFr3.696, having shed 58% this year. Its market capitalisation has dropped to SFr10.7bn compared with SFr51bn for arch-rival UBS.
The bank's five-year credit default swaps, which offer protection against defaulting on its debt, jumped to 250.25 on Monday, up from 235 on Friday and 214 a week earlier – and 56 at the start of the year. CDS can be volatile and the default swaps of other banks have widened this year amid turbulent financial markets.
Additional worries
Credit Suisse’s Additional Tier 1 bonds tumbled by up to 12 points on Monday, according to Tradeweb. The cash price of its most recent AT1, a 9.75% US$1.65bn perpetual non-call 2027 transaction, dropped from 98.20 to 86.60 by 10am, before edging back to 89.10 around midday.
“The moves look overdone and unjustified, especially as the market has started to price in a poor outcome for bondholders,” said Romain Miginiac, fund manager and head of research at Atlanticomnium. He said CS had SFr10bn of excess capital and more than SFr200bn of liquidity at the end of June so its fundamentals were robust.
“The question mark is around strategy, where the direction of travel is clear, especially with the chairman and CEO being ex-UBS – a huge cut to the CIB and a focus on wealth/asset management and domestic banking," he said.
Reuters has reported Credit Suisse is considering raising capital, although the bank is expected to try and avoid that as it would be highly dilutive at the current share price.
Miginiac said the rumoured size of the bank's capital gap is around SFr4bn and this “is definitely not a potential credit event for CS, rather a painful moment for shareholders”. He said while SFr4bn looks large compared to the bank’s market capitalisation, "it definitely doesn’t look worrisome compared to excess capital".
Nonsense
The pain was not limited to Credit Suisse’s sub debt. The bank’s senior bonds were also hard hit, with its short-end euro holdco notes quoted more than 120bp wider. "[The moves] are kind of nonsense, but this is a fragile market where liquidity is key, and there's not a lot of liquidity supporting the name," said a FIG syndicate head.
Market participants said the AT1 moves are particularly relevant after Credit Suisse raised its AT1 issuance guidance for 2022 to SFr2bn–SFr4bn-equivalent in July from SFr2bn. It has so far printed SFr1.63bn-equivalent.
Analysts at CreditSights said in a note: "Those rumours (about credit standing) looked wild and unfounded given Credit Suisse’s relatively strong capital and liquidity, but the situation is reminiscent of Deutsche Bank’s restructuring efforts a few years ago, when speculation in the market snowballed to put pressure on its management."
There are also worries about weak revenues from its investment bank after a series of scandals, an industry-wide slump in underwriting this year and several profit warnings in past quarters. Credit Suisse has also continued to lose senior investment bankers, raising concern that it will damage the business, including Jens Welter, who last week quit after 27 years at the Swiss bank to join Citigroup.
Options being considered by Koerner include spinning off the advisory and capital markets arm as a First Boston boutique, according to reports. The bank has already said it is seeking third-party capital for its securitised products division. Koerner could also reestablish a bad bank to house unwanted assets.
Credit Suisse said on September 26 it was "well on track" with its strategic review, and said that could include divestitures and asset sales. It said the review included "measures to strengthen the wealth management franchise, transform the investment bank into a capital-light, advisory-led banking business and more focused markets business, evaluate strategic options for the securitised products business, which includes attracting third-party capital", and cutting costs.
Part of the problem, however, is that it has limited cash free for a major restructuring, which can be expensive if high paid bankers are laid off. "Its capital ratios are adequate at the moment, but asset sales or reductions in the restructuring plan are likely to create losses and restructuring costs," CreditSights said.