Share prices for the Swiss giant plunged, falling by as much as around 30 per cent. The cost of insurance against a possible default soared, with the probability of default priced at more than 40 per cent at times. These developments also triggered sharp declines in share prices for almost all other European banks, as worries spread about a chain reaction or at least a significantly gloomier earnings outlook for the European banking sector as a whole.
Fundamental data versus investor sentiment
However, from a fundamental perspective, these developments are not completely logical. The problems afflicting Credit Suisse, which are mostly homemade, are not new and have not grown far worse in the past few days. It is well known that the bank suffered a large loss in 2022 (in part due to restructuring its business) and this has already been discounted in the share price. Everyone in the market knows that the bank is likely facing a long, difficult path to restoring its past profitability. According to an Executive Board member at Credit Suisse, outflows of customer funds came to an end in the fourth quarter of 2022.
Bad news, but little of it is new
Recently, however, doubts have been raised about this statement, even by the US Securities Exchange Commission. In light of the latest bank failures in the USA, this was probably one aspect that contributed to the intense market reaction. In this regard, it probably did not help that Credit Suisse had to admit in its latest annual report that there were significant shortcomings in its internal controlling and risk management systems. Another negative point for the market was that the largest individual shareholder, a Saudi bank, stated that it was not inclined to provide additional financial assistance. This statement, however, was hardly surprising and added nothing new.
Saudi shareholder sees no need for additional capital
The aforementioned investor already holds 9.9 per cent of the shares in Credit Suisse. Providing additional funds would lift it above the threshold of 10 per cent, triggering significant regulatory consequences, both in Switzerland and in Saudi Arabia. Actually, it was already common knowledge that the investor never had any interest in exceeding this threshold. Moreover, the markets generally ignored the second part of the statement, which said that the Saudi shareholder was quite happy with the transformation plans at Credit Suisse and did not see a need for any additional capital.
Credit Suisse meets regulatory capital and liquidity requirements
The fundamental data back up this assessment. The core capital ratio (Tier 1 Core) is above 13 per cent, and thus higher than the regulatory requirements. The bank’s liquidity indicators are also higher than the required levels. Yesterday, the Swiss supervisory authority, Finma, once again explicitly confirmed the bank’s very good capital and liquidity situation and assured that the relevant information provided by Credit Suisse was accurate.
Swiss National Bank promises EUR 50 billion in liquidity assistance
Ultimately, from an external perspective, it is very difficult to assess the bank’s short-term liquidity and the developments in capital outflows. There have recently been some signs of possible stress emerging at Credit Suisse, including an increase in the bank’s interest rates on deposits. However, on March 15, the Swiss National Bank announced that it would extend the equivalent of EUR 50 billion in additional liquidity to Credit Suisse. For now, this should alleviate a great deal of stress in the market. All in all, while it is possible that Credit Suisse is facing a short-term liquidity problem, the institution looks quite solid in terms of its main solvency indicators.
Whether or not the bank’s long-term restructuring will lead to a more profitable and sustainable business again is a different question, which is relatively unimportant for the financial markets right now and is probably mainly an issue for Credit Suisse’s shareholders.
Very low exposure
The retail investment funds of Raiffeisen Capital Management have no exposure or only very small positions in the bonds issued by Credit Suisse. Naturally, however, there are investments in larger, systemically-important banks and financial services providers, albeit generally at a substantially below-average level compared to the market as a whole. This applies to both our bond and equity portfolios. Consequently, the share price declines in the European banking sector have had little effect on our funds.
Summary
From the current perspective, we do not believe that the US bank failures or the rumours and market reactions related to Credit Suisse represent the beginning of another banking crisis. In part, this is because banks’ capital adequacy levels are far better than they were back in 2008/2009 and also because the central banks and supervisory authorities have reacted quite quickly and efficiently so far.