After the sudden collapse of the US-based Silcon Valley Bank (SVB) and Signature Bank, there have been talks of Credit Suisse to be the next one to fall. Shares of the bank, which has been reeling with problems for a long time, fell nearly 30 per cent on Wednesday. Here’s why the shares of the company have seen a significant decline, and what is the issue:
What Is the Issue?
Credit Suisse’s shares on Wednesday plunged as much as 30 per cent, after its largest shareholder Saudi National Bank (SNB) said it could not provide further support. Saudi National Bank, which holds 9.88 per cent of Credit Suisse, said it would not buy more shares on regulatory grounds.
Switzerland’s second-biggest bank is battling to recover from a string of scandals that have undermined the confidence of investors and clients.
Santander Consumer USA on Wednesday also postponed the sale of bonds worth $942 million that are backed by subprime auto loans as the deepening Credit Suisse Group AG crisis added to turmoil in debt markets, Bloomberg News reported on Wednesday.
On Tuesday, March 14, Credit Suisse in its annual report 2022 said it had identified “material weaknesses” in controls over financial reporting and had not yet stemmed customer outflow. It had seen fourth quarter customer outflows rise to more than 110 billion Swiss francs ($120 billion).
Five-year credit default swaps on Credit Suisse debt widened to 574 basis points from 549 bps at last close, based on data from S&P Global Market Intelligence, a new record high.
What is The Way Forward?
In order to manage the current crisis, Credit Suisse Group AG on Thursday said it will borrow up to $54 billion from the Swiss National Bank, to strengthen its liquidity. It said the additional liquidity would support Credit Suisse’s core business and clients as the bank takes necessary steps to create a simpler and more focused bank built.
There has been pressure on the Swiss government to bail out the major bank.
Credit Suisse’s Past Problems
The shares of the Switzerland’s second-biggest bank in October also had witnessed a significant decline — falling as much as 90 per cent from its all-time high levels. Its market cap fell lower than HDFC Bank, ICICI Bank, SBI, IndusInd Bank and Axis Bank.
The trouble at Credit Suisse involved high-profile risk management failures in the past and multiple changes in top leadership since 2020. Its CEO Ulrich Koerner also wrote a letter to employees on September 30. In the letter, the CEO told employees, “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.”
What Is Credit Default Swap and Its Role In the Credit Suisse Issue?
Credit Suisse’s five-year Credit Default Swap (CDS), the cost of insuring the bank’s bonds, rose to 574 basis points from 549 bps at last close, a new record high. Under the CDS, if a company fails to meet its repayment obligation, the insurance company pays the amount. An increase in CDS shows more likelihood of a debt default or rising problem in a company, and vice-versa.
The sharp rise in Credit Suisse’s CDS, which reached its highest since the global financial crisis of 2008, prompts the investor to sell its shares in the fear of a collapse.
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