As rising interest rates and trade risks are clouding the global economic landscape, markets have been particularly harsh on the Swiss lender Credit Suisse (CS). Credit Suisse’s credit default swaps or CDS costs peaked to their highest level since 2009, sending the lender’s shares to record lows earlier this week. A CDS is essentially an insurance, one can take out if a company is too insolvent to pay its bond holders. Rising CDS rates signal a worsening perception of Credit Suisse’s credit worthiness.
Exhibit 1: Credit Suisse shares have fallen over 50% so far this year
Source: Bloomberg, 6 October 2022
Exhibit 2: Credit Suisse Credit Default Swaps (CDS) spike
Source: Reuters, 3 October 2022
Why does Credit Suisse matter?
According to S&P Global Market Intelligence, Credit Suisse is the 45th largest bank in the world, the 17th largest in Europe and the second largest in Switzerland. The Swiss National Bank has designated it one of the country’s global systemically important banks, whose failure would mean “significant harm to the Swiss economy and financial system”. Credit Suisse reported $1.47 trillion in assets under management as of the end of the second quarter of 2022.
The troublesome investment banking arm
The trigger point for the collapse of Credit Suisse shares was a rumour about a key international investment bank on the verge of collapse, which many assumed to be Credit Suisse. On top of it, the bank’s recently appointed CEO Ulrich Koerner’s staff memo failed to calm employees and markets. Investment banking which contributes about a third of Credit Suisse’s revenues, has seen a recent decline due to the global slowdown in dealmaking activity. Moreover, the bank has been severely hurt by multiple scandals costing billions of dollars. The word on the street is that the bank may likely spin off its investment banking business at its upcoming restructuring announcement.
Another Lehman Brothers meltdown?
According to JPMorgan Chase & Co. analyst, Kian Abouhossein, Credit Suisse is worth at least $15 billion when the Swiss bank’s shares are currently trading at a market value of a little over $11 billion. As the bank is set to unveil a strategic review this month, the analyst notes that the lender needs to undertake a “final restructuring” and shift focus from investment banking to its valuable wealth management platform.
Johann Scholtz, an equity analyst at Morningstar, is doubtful if Credit Suisse will see a Lehman Brothers-like collapse because of the Swiss lender’s higher equity capital levels. He adds that not just Credit Suisse but the overall banking system is much different from the Great Financial Crisis of 2008. The complete overhaul of the structure of banking capitalisation offers a better outlook for bank solvency.
While the No.2 Swiss bank boasts of a $100 billion capital buffer, it may get more difficult to raise additional capital that the bank needs for restructuring due to the surging costs of its credit default swaps.
