Should Credit Suisse fear a fate at Lehman Brothers?

Credit Suisse is back in the news. After a turbulent week in the markets, the bank on Friday offered to buy around 3 billion Swiss francs (3.1 billion euros) of its own debt, denominated in dollars, euros and pounds sterling. The bank intends to do so “take advantage of market conditions to buy back debt at attractive prices”, she said in a statement. In fact, the bank intends to buy back these bonds at 96% of the par (face value), according to the Bloomberg agency, an attractive discount for a banking group of this size.

This announcement is clearly intended to reassure investors and key customers. The latter could, in fact, be won over by concerns that have arisen in recent days over the health of the Swiss banking sector’s number two, whose reputation has been tarnished for two years by repeated scandals.

Mission partially successful, at least in the short term. The share price has risen more than 5% in a generally bearish market (the share has dropped 50% since January) and especially the CDS price, theand cost to protect against the risk of default, started to fall back to 300 basis points, after approaching 345 basis points on Monday, following the publication of an article in the Financial Times reporting on the bank’s management efforts to convince customers and investors of the group’s balance sheet strength.

A race against time, as the new CEO, Ulrich Köner, newly appointed last July, is expected to present, on October 27, his plan to turn the bank around. In buying back its debt, Credit Suisse is following in the footsteps of Deutsche Bank in 2016, which also bought billions of dollars of its own debt amid rumors about its financial health.

Once again, the CDS acted as a warning sign. These derivative instruments are considered as protection against an issuer’s bankruptcy. In practice, they are mostly used for speculative purposes, like most derivatives. However, the CDS gives an indication of the level of credit premium (spread) that the issuer must pay in relation to a risk-free asset.

While Credit Suisse’s CDS price is hovering around 300 basis points – a much higher level than in 2009, at the height of the financial crisis, competitor UBS’s CDS price is hovering around 125 basis points and that of BNP Paribas around 80 basis points. This shows the level of distrust achieved by Credit Suisse in the market.

Bankruptcy and fines

It must be recognized that the history of the bank’s investments, the famous historic, that’s scary. It is first of all the bankruptcy of the financial company Greensill, in March 2021, which puts in difficulty the banking establishment that had committed 10 billion dollars to it. A few weeks later, another blow came with the Archegos implosion, which cost the bank an estimated $5 billion. The Swiss bank must then record a charge of 4.4 billion Swiss francs on its accounts to cover the damage.

In October 2021, the bank was ordered to pay around US$475 million to the American and British authorities to resolve cases related to loans in Mozambique for lack of internal control. Furthermore, in June 2022, there was a conviction in Switzerland for aggravated money laundering.

governance issues

The group’s governance is also in the headlines. In 2019, an incredible spy story led to the departure of the charismatic boss at the time, Tidjane Thiam. This summer, Credit Suisse chairman Antonio Horta-Osorio was forced to resign after breaking health rules. It is now up to discreet Swiss-German banker Ulrich Körner, who came from competitor UBS, to raise the bar. The conclusions of its strategic review will thus be known on the 27th of October, without filtering information on the decisions that will be taken at the moment; mainly in terms of asset disposals. What is certain, the economic and market environment is less favorable to the sale of assets today than it was yesterday.

In a statement dated September 26, the bank said it was “on track with its full strategic review, including potential divestitures and asset sales”. “Although there has been an increased level of speculation in the media and markets about its potential outcome”the institution reaffirmed its desire to provide an update on this strategic review “October 27” when releasing third quarter results. On the other hand, with its employees whom Ulrich Körner addressed in early October in a note. Admitting the uncertainties and noises of the market, the president, however, mentioned a recent conference on wealth management whose theme was “Rising like the Phoenix”, which according to him ” a good metaphor for what we want to achieve.”.

“Extremely strong” liquidity capital ratios

Analysts do not believe in a disaster scenario à la “Lehman Brothers”, this American bank whose collapse precipitated the financial crisis in 2008. According to Guillaume Larmaraud, partner responsible for financial services at Colombus Consulting, Credit Suisse “remains a solid financial institution”. Well, John Plassard, director of Mirabeau, “ people who bet on Credit Suisse going bankrupt are wrong and remember that “extremely strong liquidity and capital ratios”.

Unwavering government support

In addition, the Swiss government is preparing to vote on a safety net to support large banks deemed to be at systemic risk. ” It is one of Switzerland’s strengths to have an extremely efficient banking service. It is therefore obvious that the government will not disappoint an establishment of this magnitude in the event of a crisis.”highlights, remembering that in 2008, the executive at the time had flown to the rescue of UBS.

not forgetting that “Finma is closely monitoring Credit Suisse’s situation at the moment, to avoid a contagion phenomenon should the bank encounter problems,” specifies John Passard. Finally, ” the Swiss national bank also announced that it is closely monitoring developments.. All eyes are therefore on Crédit Suisse, which has not yet finished getting people talking about it.