Banking Experts Predict What Could Happen Next

Swiss credit may have received a Swiss National Bank liquidity lifelinebut analysts are still weighing the beleaguered lender’s prognosis, weighing the option of a sale and whether it is indeed “too big to fail”.

Credit Suisse management began talks over the weekend to assess “strategic scenarios” for the bank, Reuters reported citing sources.

He comes after the The Financial Times reported friday that UBS is in talks to take over all or part of Credit Suisse, citing several people involved in the discussions. Neither bank commented on the report when contacted by CNBC.

According to the FT, the Swiss National Bank and Finma, its regulator, are behind the negotiations, which aim to boost confidence in the Swiss banking sector. The banks U.S. Listed Stocks were about 7% higher in after-hours trading early Saturday.

Credit Suisse is undertaking a massive strategic overhaul aimed at restoring stability and profitability after a litany of losses and scandalsbut markets and stakeholders still seem unconvinced.

Shares fell again on Friday to record their worst weekly drop since the start of the coronavirus pandemic, failing to hold on Thursday’s earnings following the announcement that Credit Suisse would have access to a loan of up to 50 billion Swiss francs ($54 billion) from the central bank.

Credit Suisse lost around 38% of its deposits in the fourth quarter of 2022 and revealed in its delayed annual report earlier this week that outflows have yet to reverse. It recorded a net loss of 7.3 billion Swiss francs for 2022 and expects a “substantial” further loss in 2023, before returning to profitability next year as restructuring begins to bear fruit.

This week’s news feed is unlikely to have changed the minds of depositors considering withdrawing their money.

In the meantime, credit default swaps, which insures bondholders against corporate default, hit new highs this week. According to the CDS rate, the bank’s default risk reached crisis levels, with the 1-year CDS rate jumping nearly 33 percentage points to 38.4% on Wednesday, before ending Thursday at 34.2. %.

UBS sale?

Rumors have long swirled that parts – or all – of Credit Suisse could be acquired by a domestic rival UBSwhich has a market capitalization of around $60 billion compared to $7 billion for its struggling compatriot.

JPMorgan’s Kian Abouhossein described a takeover “as the most likely scenario, especially by UBS.”

In a note on Thursday, he said a sale to UBS would likely lead to: The Swiss bank’s IPO or spin-off from Credit Suisse to avoid “too much concentration risk and market share control on the Swiss domestic market”; the closure of its investment bank; and maintaining its wealth management and asset management divisions.

The two banks are said to be opposed to the idea of ​​a forced merger, even if the events of this week may well have changed the situation.

Vincent Kaufmann, CEO of Ethos, a foundation that represents shareholders holding more than 3% of Credit Suisse shares, told CNBC that his preference was “always to have a spin-off and independent listing from the Swiss division of CS. “.

“A merger would pose a very high systemic risk for Switzerland and would also create a dangerous monopoly for Swiss citizens,” he added.

Bank of America strategists noted Thursday that Swiss authorities may prefer a consolidation between flagship national bank Credit Suisse and a smaller regional partner because any combination with UBS could create “a bank too big for the country.”

“Orderly resolution” needed

The bank is under pressure to find an “orderly” solution to the crisis, be it a sale to UBS or another option.

Barry Norris, CEO of Argonaut Capital, which has a short position in Credit Suisse, stressed the importance of a smooth unwinding.

“The whole bank is essentially in liquidation and whether that liquidation is orderly or disorderly is the debate right now, but none of that is creating shareholder value,” he said Friday. to CNBC’s “Squawk Box Europe.”

European banking stocks have suffered steep declines throughout Credit Suisse’s latest saga, underscoring market concerns about the contagion effect given the sheer scale of the 167-year-old institution.

The sector was rocked earlier this week by the collapse of Silicon Valley Bank, the biggest bank failure since Lehman Brothers, as well as the closure of New York-based Signature Bank.

Yet in terms of scale and potential impact on the global economy, these companies pale in comparison to Credit Suisse, whose balance sheet is roughly double that of Lehman Brothers when it failed, at around 530 billion francs. Swiss at the end of 2022. It is also much more globally interconnected, with multiple international subsidiaries.

“I think in Europe the battleground is Credit Suisse, but if Credit Suisse has to unwind its balance sheet in a disorderly way, these problems will spread to other financial institutions in Europe and also beyond the sector. banking, in particular I’m thinking of commercial real estate and private equity, which I also think are vulnerable to what’s happening in the financial markets right now,” Norris warned.

The importance of an “orderly resolution” was echoed by Andrew Kenningham, chief European economist at Capital Economics.

“As a Global Systemically Important Bank (or GSIB), it will have a resolution plan, but these plans (or ‘living wills’) have not been tested since their introduction during the global financial crisis,” Kenningham said.

“Experience suggests that a quick resolution can be achieved without triggering too much contagion provided authorities act decisively and senior debtors are protected.”

He added that if regulators are aware of this, as evidenced by the intervention on Wednesday by the SNB and the Swiss regulator FINMA, the risk of a “botched resolution” will worry the markets until a long-term solution is found. to the bank’s problems become clear.

Central banks to provide liquidity

The biggest question economists and traders wrestle with is whether the Credit Suisse situation poses systemic risk to the global banking system.

Oxford Economics said in a note on Friday that it was not incorporating a financial crisis in its base case because that would require systemic credit or liquidity problems. For now, the forecaster sees the problems at Credit Suisse and SVB as “a collection of different idiosyncratic issues.”

“The only generalized problem we can infer at this point is that the banks – all of which have been required to hold large amounts of sovereign debt against their fickle deposits – may be sitting on unrealized losses on these high-quality bonds while that yields have gone up,” chief economist Adam Slater said.

“We know that for most banks, including Credit Suisse, this exposure to higher yields has been largely hedged. Therefore, it is difficult to see a systemic problem unless it is driven by another factor that we are not yet aware of.”

Even so, Slater noted that “fear itself” can trigger depositor outflows, which is why it will be crucial for central banks to provide liquidity.

THE US Federal Reserve moved quickly to establish a new facility and protect depositors following the collapse of SVB, while the Swiss National Bank signaled that it would continue to support Credit Suisse, with proactive engagement also coming from the European Central Bank and the bank of england.

“So the most likely scenario is for central banks to remain vigilant and provide liquidity to help the banking sector through this episode. This would mean a gradual easing of tensions as in the LDI retirement episode in the UK late last year,” Slater suggested.

Kenningham, however, argued that while Credit Suisse was widely seen as the weak link among Europe’s big banks, it was not alone in battling weak profitability in recent years.

“Furthermore, this is the third ‘one-off’ issue in a matter of months, following the UK gilt market crisis in September and the US regional bank failures last week, so it would be foolish to assume that there won’t be any more problems coming down the road,” he concluded.

– CNBC’s Katrina Bishop, Leonie Kidd and Darla Mercado contributed to this report.