Things have been going down at Credit Suisse for a while now. After scandals such as Archegos, Greensill and a recently departed CEO, the investment bank must be reorganized within the group. And that’s going to cost money. Money that shareholders know will dilute their holdings anyway. The share price has more than halved since the beginning of this year.
Therefore, it is also about money that must be raised at low valuations. Meanwhile, the bank’s bonds are going over the counter for floor prices. The shares are also priced at only 23 percent of the tangible book value of the bank. In short: the bank is on sale. This will make the reorganization of the investment bank a costly affair. On October 27, the bank will come up with a strategic plan.
So there was already a storm, but on Friday it really started to rumble. Suddenly, financial media and financially interested people began to speculate wildly on Twitter about the bank’s toppling. Strangely enough, it all started with an internal reassurance from the top man. On Friday, CEO Ulrich Koerner sent a memo to the staff that does not lie about it.
“Without a doubt, there will be more noise in the press and in the financial markets between now and the end of October,” he wrote. “I can only tell you to stay disciplined and stay as close to customers and colleagues as possible. I know it’s not easy to stay focused when you read all the stories in the media – especially because of the many factually inaccurate statements that are being made. That said, I am confident that you will not confuse our daily share price with the bank’s strong capital base and liquidity position.’
The result: turmoil on Twitter. One writes that Credit Suisse is on the verge of tipping over and points to the low share price. Others piled on top of each other with pictures of Bloomberg terminals. The prices of credit default swaps, which cover the risk that the bank will not be able to pay its loans, skyrocketed on Friday.
The question is whether these indicators actually predict the bank’s toppling. Investors also use credit default swaps to place simple bets on prices, or to hedge risk in entire sectors. That reinforces price increases of credit default swaps, but does not mean that everyone is already rushing to the exit, writes The Financial Times. However, it is an indisputable fact that the bank’s capital costs will not be reduced.
But does Koerner have a point? He writes that the share price is falling while the bank’s capital position is above water like a pole. A look at the numbers seems to indicate this. For example, according to the second quarterly report of this year, the bank has a so-called liquidity coverage ratio of 191 percent. This ratio is one of the pillars of the Basel policy, which imposes capital requirements on banks.
In short, the Liquidity Coverage Ratio measures whether there are enough high-quality liquid assets in a very severe scenario for 30 days to actually cope with that severe scenario. According to those capital requirements, a liquidity coverage ratio of 100 percent is required. The fact that Credit Suisse is 91 percent above that is encouraging to say the least.
Yet the Financial Times writes that team leaders at Credit Suisse have been calling customers, counterparties and investors all weekend to reassure them about the bank’s capital position. Whether that will succeed is the question.
Crucial is the plan that the bank will come up with at the end of October. Koerner has previously indicated that he wants to shrink the investment bank and focus the bank primarily on asset management, which also happens to be a less money-absorbing branch. But what exactly that plan looks like remains fairly vague for now.
