Fail or sale? What could be next for stricken Credit Suisse
Credit Suisse may have received a liquidity lifeline from the Swiss National Bank, but analysts are still assessing the embattled lender's prognosis, weighing the option of a sale and whether it is indeed "too big to fail."
Credit Suisse's management began crunch talks this weekend to assess "strategic scenarios" for the bank, Reuters reported citing sources.
On Friday, the Financial Times reported that UBS is in talks to take over all or part of Credit Suisse, citing multiple people involved in the discussions. According to the report, the Swiss National Bank and Finma, its regulator, are behind the negotiations, which are aimed at boosting confidence in the Swiss banking sector.
Neither bank commented on the report when contacted by CNBC.
The bank is undergoing a massive strategic overhaul aimed at restoring stability and profitability after a litany of losses and scandals, but markets and stakeholders still appear unconvinced.
Shares fell again on Friday to register their worst weekly decline since the onset of the coronavirus pandemic, failing to hold on to Thursday's gains which followed an announcement that Credit Suisse would access 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 are still yet to reverse. It reported a full-year net loss of 7.3 billion Swiss francs for 2022 and expects a further "substantial" loss in 2023, before returning to profitability next year as the restructure begins to bear fruit.
This week's news flow is unlikely to have changed the minds of depositors considering pulling their money. Meanwhile, credit default swaps, which insure bondholders against a company defaulting, soared to new record highs this week.
According to the CDS rate, the bank's default risk has surged to crisis levels, with the 1-year CDS rate jumping by almost 33 percentage points to 38.4% on Wednesday, before finishing Thursday at 34.2%.
There has long been chatter that parts — or all — of Credit Suisse could be acquired by domestic rival UBS, which boasts a market cap of around $60 billion to its struggling compatriot's $7 billion.
JPMorgan's Kian Abouhossein described a takeover "as the more likely scenario, especially by UBS."
In a note Thursday, he said a sale to UBS would likely lead to: The IPO or spinoff of Credit Suisse's Swiss bank to avoid "too much concentration risk and market share control in the Swiss domestic market"; the closure of its investment bank; and retention of its wealth management and asset management divisions.
Both banks have been reported to be opposed to the idea of a forced tie-up, although this week's events could well have change that.
Bank of America strategists on Thursday noted that Swiss authorities may prefer consolidation between Credit Suisse's flagship domestic bank and a smaller regional partner, since any combination with UBS could create "too large a bank for the country."
'Orderly resolution' needed
Barry Norris, CEO of Argonaut Capital, which has a short position in Credit Suisse, stressed the importance of an orderly solution to the crisis.
"The whole bank is in a wind-down essentially and whether that wind-down is orderly or disorderly is the debate at the moment, none of which though creates value for shareholders," he told CNBC's "Squawk Box Europe" on Friday.
European banking shares have suffered steep declines throughout the latest Credit Suisse saga, highlighting market concerns about the contagion effect given the sheer scale of the 167-year-old institution.
The sector was rocked at the beginning of the week by the collapse of Silicon Valley Bank, the largest banking failure since Lehman Brothers, along with the shuttering 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 around twice the size of Lehman Brothers when it collapsed, at around 530 billion Swiss francs as of end-2022. It is also far more globally inter-connected, 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, those problems are going to spread to other financial institutions in Europe and also beyond the banking sector, particularly I think into commercial property and private equity, which also look to me to be vulnerable to what's going on in financial markets at the moment," 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 put to the test since they were introduced during the Global Financial Crisis," Kenningham said.
"Experience suggests that a quick resolution can be achieved without triggering too much contagion provided that the authorities act decisively and senior debtors are protected."
He added that while regulators are aware of this, as evidenced by the SNB and Swiss regulator FINMA stepping in on Wednesday, the risk of a "botched resolution" will worry markets until a long-term solution to the bank's problems becomes clear.
Central banks to provide liquidity
The biggest question economists and traders are wrestling with is whether Credit Suisse's situation poses a systemic risk to the global banking system.
Oxford Economics said in a note Friday that it was not incorporating a financial crisis into its baseline scenario, since that would require systemic problematic credit or liquidity issues. At the moment, the forecaster sees the problems at Credit Suisse and SVB as "a collection of different idiosyncratic issues."
"The only generalised problem that we can infer at this stage is that banks – who have all been required to hold large amounts of sovereign debt against their flighty deposits – may be sitting on unrealised losses on those high-quality bonds as yields have risen," said Lead Economist Adam Slater.
"We know that for most banks, including Credit Suisse, that exposure to higher yields has largely been hedged. Therefore, it is difficult to see a systemic problem unless driven by some other factor of which we are not yet aware."
Despite this, Slater noted that "fear itself" can trigger depositor flights, which is why it will be crucial for central banks to provide liquidity.
The U.S. Federal Reserve moved quickly to establish a new facility and protect depositors in the wake of the SVB collapse, while the Swiss National Bank has signaled that it will 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 that central banks remain vigilant and provide liquidity to help the banking sector through this episode. That would mean a gradual easing of tensions as in the LDI pension episode in the U.K. 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 is not the only one to struggle with weak profitability in recent years.
"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," he concluded.
— CNBC's Darla Mercado contributed to this report