How Credit Suisse turned Switzerland’s banking industry into a national embarrassment
Once the pride of the Swiss banking industry, Credit Suisse’s fall from grace shows few signs of abating.
The beleaguered lender has this week found itself fighting fires on multiple fronts.
Firstly, the Swiss financial regulator said it was “closely monitoring” Credit Suisse and other Swiss lenders following the collapse of Silicon Valley Bank (SVB).
Secondly, the bank was forced to admit it had “material weaknesses” in its reporting and controls procedures. Thirdly, it revealed that a prolonged wave of customer outflows has yet to reverse.
And finally, its top shareholder ruled out injecting any more cash into the business on Wednesday morning.
Zurich-listed shares in the bank plunged by more than a fifth in early trading, taking the total drop for the week to over 30pc amid the wider market turmoil triggered by the demise of SVB.
Yet the crisis of confidence predates this week’s upheaval: the share price is now down by nearly two-fifths since the beginning of the year and by almost three-quarters over the last 12 months.
Ulrich Körner, the bank’s new chief executive who is embarking on a radical overhaul plan, came out on Tuesday pleading for patience.
“Nobody is pleased by the share price development, but we manage what we can manage, and this is the execution of our plan,” Körner told Bloomberg TV.
Though in a sign of his own growing impatience with stakeholders, he added: “We said it’s a three year transformation, and you can’t come after two months [and say] ‘Why is everything not done?’”
The long list of Credit Suisse’s recent problems over the last two years include: exposure to hedge fund blow-ups; a $475m scandal in Mozambique; the swift departure of its gaffe-prone chairman; a money laundering conviction; surging withdrawals; and a £6.5bn annual loss.
Outside of the problems of Credit Suisse’s own creation, Körner is also having to contend with growing fears of European banking contagion.
On Monday, bets that Credit Suisse would default on its loans hit record highs following the collapse of two US lenders.
Fearful that Credit Suisse’s well-documented weaknesses increased the risk of the 167-year-old lender falling into default, money poured into credit default swaps – an investment that is designed to protect investors against distress by triggering a repayment if certain default criteria are met.
Five-year credit default swaps for Credit Suisse rose as much as 36 basis points on Monday to a record high of 453 basis points, according to pricing source CMAQ.
Swiss financial regulator FINMA said it was tracking the situation after the share prices of Credit Suisse and rival UBS fell sharply on Monday.
Credit Suisse’s shares continued to drop on Tuesday, falling a further 2pc, while UBS’ rebounded to trade 3pc higher.
FINMA said it was “closely monitoring the situation”, adding: “FINMA is evaluating the direct and indirect exposure of the banks and insurance companies it supervises to the institutions concerned.
“The aim is to identify any cluster risks and potential for contagion at an early stage.”
Yet Körner has tried to remain upbeat amid the turmoil. On Tuesday, he said he was buoyed by the bank’s faster-than-expected progress on a wave of job cuts and added that there were signs customer confidence was returning.
“We got inflows yesterday, which is a positive sign I would say. We even saw material good inflows yesterday.”
While Körner is hoping this will be the start of a trend reversal, a single day of inflows will not be enough to quell investor pressure.
In its annual report, the bank revealed that customer outflows had stabilised to much lower levels but had not yet reversed.
Market worries have been plaguing Credit Suisse for some time over the bank’s ability to deliver a restructuring plan amid the wave of clients pulling funds from the lender – a figure that ballooned to around $120bn in the final quarter of last year.
Last month, Andrew Coombs, an analyst at Citigroup downgraded his rating of the bank, saying: “While management provided some reassurance on flows and on capital and liquidity… they also raised serious questions on the future trajectory of profits with the CEO pointing to another ‘substantial’ loss in 2023.”
In October, Körner unveiled a three-year turnaround plan which included axing 9,000 jobs, shifting its focus from investment banking towards managing the wealth of its rich clients and taking a 1.5bn Swiss Franc (£1.3bn) investment from Saudi Arabia’s biggest bank.
As part of the overhaul, Credit Suisse’s investment bank will also be spun off.
The bank endured twin hits in 2021 following the collapse of supply chain finance group Greensill Capital and family office Archegos, triggering a prolonged period of crisis for the bank.
Those two scandals led to $10bn (£8bn) of its clients’ assets being frozen and a $5.5bn trading loss.
Last week, to add further insult to injury, Credit Suisse was forced to delay the publication of its annual report after an eleventh-hour query by US regulators on its previous filings.
The reason for the delay was revealed on Tuesday when the bank said it had identified “material weaknesses” in its reporting and controls procedures for the last two years in the latest blow to the scandal-hit lender.
It said: “Management did not design and maintain an effective risk assessment process to identify and analyse the risk of material misstatements in its financial statements.”
Körner said he was addressing the issue “very forcefully”, adding that there was no impact on the company’s financial results for 2022 or previous years.
Körner undoubtedly has an unenviable job on his hands. He says all he needs is time: “We are absolutely doing the right thing, it takes some time to get through. We want to get back all that we lost. And once we are there, we go beyond and grow the business again.”
Investors are starting to become restless and will want to see action rather than words.