At Credit Suisse, they’re living through days for the history books — but not in a good sense. The price of the once so proud major Swiss bank again marked a historic low on Wednesday: in the afternoon a share cost around 2.80 francs, less than ever. Even compared to the anything but rosy previous year, this is a devastating number. And the last drop in the price was not that long ago: the share had only dropped sharply at the beginning of October, to less than four francs – at that time mainly because there was speculation on social media about the demise of Credit Suisse.
In the end it didn’t come to that, the price recovered again, and a few weeks later the ailing bank launched a liberation. On October 27, the management duo around CEO Ulrich Körner and Chairman of the Board of Directors Axel Lehmann presented a radical restructuring plan: Credit Suisse, which has had several years of crisis behind it and will probably soon have to announce its fifth consecutive quarter of losses, is to be transformed into a small UBS. Like its powerful competitors, Credit Suisse is also set to become primarily an asset manager, investment banking is set to shrink sharply and an iron-clad austerity program is set to bring in profits again soon.
The capital increase is going according to plan, but it does not bring peace
The most important part of the plan is a capital increase. With the issue of new shares, Credit Suisse wants to raise four billion francs of fresh money, which is intended to finance the expensive restructuring.
At an extraordinary general meeting last Wednesday, more than 90 percent of shareholders voted in favor of the plan – although a capital increase will dilute existing shares. Now the project is already in full swing: As announced, the Saudi National Bank came in as the rescuer with around 1.5 billion francs and thus as a major shareholder. Now it’s the turn of the existing shareholders. You have received subscription rights to new shares that are currently tradable. The new shares themselves are scheduled to go public on December 9th.
So you could say: Everything is going according to plan. So why the recent slump in prices?
The first part of the answer has to do with trading the subscription rights. Apparently it’s going well – but if many investors would rather get rid of their rights than use them, that puts pressure on the stock itself. The second part has to do with explosive information that Credit Suisse had to publish on the day of its general meeting: According to this, many Credit Suisse customers withdrew their money in the wake of the turbulence at the beginning of October, up to 84 billion Swiss francs, i.e. around six Percentage of total funds under management. In asset management it was even a full ten percent. It’s an expression of the massive loss of confidence the bank has suffered in just the past few months.
According to its own statements, Credit Suisse has been able to slow down the outflow, but has not yet stopped it. And that’s pretty troubling: as customer funds flow away, so does the foundation upon which the bank hopes to build its future. Profits move even further away, which in turn deters customers.
The bank is caught in a dangerous maelstrom
The bank got caught in a kind of maelstrom. Parallel to the slump in the share, the risk premium for Credit Suisse’s so-called credit default derivatives rose to a record high on Wednesday. With these so-called credit default swaps (CDS), investors protect themselves against bankruptcies. You are therefore one important indicator for where market participants suspect the greatest risks. In the case of Credit Suisse, protecting itself against a bankruptcy within the next five years currently costs about four times as much as it does for other large banks. However, these derivatives can themselves trigger dangerous chain reactions when large companies go bankrupt.
At the same time, Credit Suisse now has to pay comparatively high interest rates when it borrows money from investors – most recently up to 9.5 percent. Banks refinance themselves both through bonds and through the money in their accounts from private investors and companies. The high interest rates are not only a signal that the financial institution is in acute difficulties, but also make it difficult to achieve a resilient business model in the medium term. The bank thus has high procurement costs and is hardly competitive. The more this impression is strengthened, the further the interest rates and thus the costs rise. In addition, the bank’s business partners in turn demand additional collateral. A dangerous downward spiral, from which the money house – contrary to expectations – could not free itself with the capital increase.
Dark forebodings are now doing the rounds again on social media. Can the bank still save itself? Might the stock price recover if trading in the subscription rights ends in a good week?
Credit Suisse itself does not want to comment on the developments. Meanwhile, more and more Swiss people are wondering whether the state will soon have to rescue another major bank. In the financial crisis almost 15 years ago, it was UBS, which is so successful today, that needed help. Now it could hit Credit Suisse. So far, there have been no concrete indications of a rescue. From the Swiss State Secretariat for International Financial Matters (SIF) it can only be heard that the financial market supervisory authority Finma “closely accompanies Credit Suisse in the context of its supervisory activities”. Crisis talks between Finma, the National Bank and the Swiss Ministry of Finance could already be going on behind the scenes, as provided for such cases since 2011.