It is hardly surprising to see Credit Suisse Group AG (NYSE:CS) attracting news headlines revolving around negative lines such as solvency, crisis, restructuring and crunch time as the banking group has over the years lurched from one crisis to another.
From the fake names for Ferdinand and Imelda Marcos scandal in 1986, the Japanese shredding crisis of 1999, US sanction breaches in 2009 and a number of tax evasion fines the Swiss banking giant has never been one to shy away from controversy.
Add to that the more recent losses from the collapses of Archegos and Greensill Capital and you can see why markets would be nervous when the rumour mill goes into overdrive regarding the banking group’s survival.
So news that the Swiss bank spent the weekend battling rumours about its financial weaknesses which sent its credit default swaps — securities that essentially gauge market perceptions of a company’s financial health — surging to a record was hardly a great surprise.
Investors have other concerns too, including lending to lower-rated corporate borrowers and weakness in core business areas like equity and debt capital markets.
More fundamentally, shareholders have worried that Credit Suisse is fundamentally incapable of competing against bigger Wall Street giants; whether its latest turnaround plans will be enough to restore confidence in the financial and strategic direction remains to be seen.
What is clear is that Swiss bank needs to raise cash and fast.
On solvency, analysts at Jefferies estimates the current gap to the group’s mid-term targets for its CET1 ratio (14%) and CET1 leverage ratio (4.5%) are SFr1.4bn and SFr1.8bn respectively.
At the end of quarter two these ratios were 13.5% and 4.3% respectively and Jefferies thinks 13% and 4% are red lines the bank will not want to breach implying a current excess of only SFr1.4bn and SFr2.5bn respectively.
The solvency of Credit Suisse AG or so-called “parent entity” also matters. As of 2Q22 its CET1 ratio was 11.4% versus the target of target of over 12% and the required minimum of 10%.
Further financial hits are likely to come from restructuring and litigation charges which Jefferies’ sees at SFr1.5-2.5bn and SFr2bn respectively.
The problems for the bank are compounded by the financial environment. It needs to raise funds and asset sales are seen as the most likely source of funds at least in the short-term.
But being a forced seller in a depressed market is likely to mean lower than expected prices for whatever assets it decides to sell.
Added to this once sold, the company’s earnings capacity is reduced.
Broker Jefferies said it thinks “asset sales alone are unlikely to be the solution to the potential capital shortfall problem, but could be a first step and buy time until the shares recover and the outlook gets better, at which time a capital raise, if needed, would be a less dilutive and more acceptable option.”
But will there be enough time? Further volatility on the markets can’t be ruled out and the bank remains vulnerable given its current financial predicament, and the pressure to meet regulatory liquidity requirements.
Too big to fail maybe but this is unlikely to be last time we write about a crisis at the Swiss bank.