The weekend just gone was rife with rumours of banks being in trouble. Rumours are of course the staple of financial markets especially on Friday afternoons. But then we got this.
ZURICH, Sept 30 (Reuters) – Credit Suisse (CSGN.S) has solid capital and liquidity, Chief Executive Ulrich Koerner told staff in a memo seen by Reuters on Friday and confirmed by a spokesperson for the Swiss bank that is due to announce the outcome of a strategic review next month.
“I know it’s not easy to remain focused amid the many stories you read in the media – in particular, given the many factually inaccurate statements being made. That said, I trust that you are not confusing our day-to-day stock price performance with the strong capital base and liquidity position of the bank,” he wrote, adding that he was unable to share details of transformation plans before Oct. 27.
Regular readers will be aware that I find the phrase “Never believe anything until it is officially denied” to be extremely useful. It came from variously Otto von Bismarck and Jim Hacker. But the point is that looks awfully like an official denial that Credit Suisse is in trouble. Also there was an unfortunate echo of the past here.
“Our capital position at the moment is strong.” Lehman Brothers CFO Sept 8, 2008.
As Lehman Brothers collapsed a week later this is not entirely reassuring.
Interest-Rates
There is some interesting timing here as the Swiss National Bank has done this in 2022.
I will begin with our monetary policy decision. We have decided to tighten our monetary
policy further and to raise the SNB policy rate by 0.75 percentage points to 0.5%.
That was from the 22nd of September and followed on from their previous decision to reduce their attempt to weaken the Swiss Franc when they raised from -0.75% to -0.25%.
There are two issues here of which the first is did that long period of negative interest-rates damage the banks?
Negative interest poses a challenge for banks, pension funds, insurance companies and savers. It may also have negative consequences for financial stability if the
search for yield leads to excessive risk taking.
If we keep the issue of excessive risk-taking in our minds we might like to recall this.
In March 2021, Archegos Capital Management, a family office founded by Bill Hwang, defaulted on its loan relationships with Credit Suisse (the Firm) after significant falls in the value of its positions. The default resulted in losses of around $5.5 billion for the investment bank, leading to job losses, resignations, regulatory action, and significant reputational harm. ( BDO)
In fact the exposure was extraordinary considering how small the gains were.
It’s worth noting that Credit Suisse made just $17.5 million in Archegos fees in 2019 for exposure to a potential $20 billion loss (at the peak of the fund’s activities) – suggesting commercial considerations had become entirely untethered from an assessment of risk. ( BDO)
There was also this.
Credit Suisse last year suspended a $10bn suite of supply chain finance funds linked to Greensill, which collapsed into administration amid allegations of fraud. While $7.3bn has been collected, the bank has warned that about $2bn will be difficult to recoup. The decision to make clients shoulder the extra costs has spread further discontent among the funds’ 1,200 investors. ( Financial Times)
That may yet come back to haunt it. If you think those were extraordinary enough then wait until you see this one.
The tuna bonds scandal arose from $1.3bn (£940m) worth of loans that Credit Suisse arranged for the Republic of Mozambique between 2012 and 2016.
The loans were said to be aimed at government-sponsored investment schemes including maritime security projects and a state tuna fishery, located in the capital Maputo.
However, a portion of the funds were unaccounted for, with one of Mozambique’s contractors later found to have secretly arranged “significant kickbacks” worth at least $137m, including $50m for bankers at Credit Suisse meant to secure more favourable deals on the loans, according to regulators. ( The Guardian September 2021)
What caused the memo?
The scandals have been public knowledge for a while now. But things had been singing along with Hard-Fi.
Pressure, pressure, pressure pressure pressureFeel the pressurePressure, pressure, pressure pressure pressure
Or as the Financial Times put it.
Having seen Credit Suisse’s share price drop more than 25 per cent last month to below SFr4, chief executive Ulrich Körner sent a company-wide memo on Friday to try to reassure staff over the bank’s capital position and liquidity.
Indeed the problem with issuing shares is that almost anytime recently would have been a better time to do it.
The collapse in Credit Suisse’s share price is of great concern. From $14.90 in Feb 2021, to $3.90 currently. ( @WallStreetSilv)
So a share issue now would dilute existing shareholders more than three times more than it would have done in February 2021. That would obviously not go down well especially as their job involves giving others advice on what to do about share issuance.
So you can sell something off. The catch with that is you would rather not sell the good bits and nobody is likely to pay much for the bad bits. Which is a circle that is not easy to square.
Credit Suisse has been advertising for partners to suck the marrow from one of its more profitable divisions. Its strategic review plan outlined in July included a promise to “evaluate strategic options for the Securitized Products business, which may include attracting third-party capital” — though its timing here really wasn’t great. ( FT Aplhaville)
Also cheap sales damage the capital position you are trying to strengthen.
A falling valuation for Securitized Products adds extra pressure to Koerner, whose plan is due to be announced at the end of the month. There’s neither much time nor much margin of error. Credit Suisse has a target capital ratio of 13-14 per cent before 2024 and >14 per cent afterwards; tweak a just couple of numbers in the RBC-supplied forecast tables below and capital suddenly becomes the big issue.
Comment
I think that it is time for a reminder that interest-rates as in this case ( Switzerland) is a simple case for now of having one are supposed to benefit banks! What we are seeing I think is something I have long warned about which is the consequence of zero and then negative interest-rates if sustained for a long time. Banks cannot make much money out of normal business so they take extra risk. If you want a wry smile then it may not be the best time for the Swiss National Bank to release this working paper.
Systemic bank runs without aggregate risk: how a
misallocation of liquidity may trigger a solvency crisis
Underneath it all is a basic business that is essentially the Swiss one.
a Swiss bank and wealth arm serving rich folk. Doing great ( @goodalexander)
How good? Higher interest-rates will help.
First – the Swiss bank benefits from higher CHF rates (est. +800M/year benefit to 2024 income). It saw +3.4CHF B of net inflows ytd even with 1.9CHF Billion of Russian outflows. The big growth area is China. CS reinvested pnl from higher rates in courting Chinese clients.
The problem is all the other bits. We are back to risk-taking again and the fact that those who advise others have not been very good at it themselves.
In summary. Whilst the core business is fine the add-ons have caused lots of trouble and may affect other banks. But there is also the fact that I was once told about Germany that it will always have 2 banks ( to preserve the illusion of choice). If Switzerland thinks the same that is UBS and Credit Suisse so they will stand behind it.
These things have other consequences though because one of the reasons the Swiss Franc has been so strong is the perception that Switzerland is both stable and well-run.Whereas Credit Suisse seems to have had the financial equivalent of whoever at Manchester United thought it was a good idea for Christain Eriksen to mark Erling Haaland at corners.