Credit Suisse enters ‘critical moment’ amid collapse fears: Fund managers weigh in

The Swiss bank has sought to reassure investors and clients of its financial strength, amid speculation it is facing its own Lehman Brothers moment.

Credit Suisse has sought to reassure investors of its financial strength, as fears rise of its imminent collapse. (Photo: Fabrice COFFRINI/AFP)

It has been a long, slow decline at Credit Suisse, one of the world’s largest banks, exacerbated this week by unrelenting speculation the Swiss giant was having difficulty raising additional capital.

Senior bankers broke cover at the weekend, with chief executive Ulrich Korner telling staff Credit Suisse was at “a critical moment” as it prepares for an overhaul.

It was one of several moves designed to reassure staff and clients that rumours of the banks demise were – that this could even be its Lehman Brothers moment – were completely unfounded.

It has been a series of scandals that has brought Credit Suisse to this place – from the collapse of Australian supply chain financier Greensill Capital to the implosion of US hedge fund Archegos Capital Management, which led to a $US5bn ($7.8bn) hit to the bank.

Concerns reached fever pitch amid unconfirmed reports – denied by the bank – that more capital was needed, and after spreads on its credit default swaps – which offer protection against default – spiked to multi-year highs.

The speculation came at a crucial time for Credit Suisse. Mr Korner, who was installed as chief executive in August, is due to announce the company’s transformation plans on October 27.

“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,” Mr Korner wrote in a memo.

“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,“ he added.

Credit Suisse’s stock has lost 70 per cent of its value in the past 18 months. But it has also been in steady decline for more than a decade, having lost more than 90 per cent of its value since 2007. The stock last traded at 3.98 Swiss francs ($6.26).

The bank’s overhaul plans are expected to include a split of the business into three, the Financial Times has reported, while thousands of jobs could be cut. Analysts at Deutsche Bank estimate Credit Suisse will need at least $US4bn if it is to rebuild. Those at RBC Capital Markets put that figure at some $US6bn.

But local fund managers who following Credit Suisse’s decline say investors and the Swiss government will intervene – if needed – to avoid a repeat of Lehman Brothers, whose collapse in 2008 played a major role in the global financial crisis that followed.

John Hempton, whose Bronte Capital had a short position on Credit Suisse last year when the Greensill Capital scandal broke, says there is still hope for the lender, if it can avoid a bank run.

“Like any other bank, Credit Suisse is subject to bank runs. But bank runs don’t just happen (for no reason). They happen because you’ve managed to convince people you‘re idiots,” he said.

“There’s always a way out, if there’s no bank run. There’s still $40bn of capital (at Credit Suisse) and they could shrink their way to greatness over five to 10 years. But the old glory days of the Swiss banker are never coming back.”

These “glory days” were cut short by the September 11 terror attacks, which brought in a new era of transparency and lower margins. Credit Suisse followed this with a series of ”stupid risks”, including Greensill, Mr Hempton added. If there were a threat of default from clients pulling their funds from the bank, the Swiss government would step in.

“I don’t know whether there’ll be a bank run or not. Ultimately, my guess is the Swiss government will step up. But even that’s not assured … the problem with Swiss banks is they are global banks based out of a small country.”

Like Mr Hempton, Lucerne Investment Partners’ chief executive Anthony Murphy expects the Swiss government would move to prevent a Credit Suisse collapse.

“With a bank the size of Credit Suisse, I just can‘t say regulators or governments allowing it to fall over. It’s one of the most important banks, particularly in Europe,” Mr Murphy said.

“Everyone is talking about the capitulation in its share price but it has had three pretty significant events; three strikes against it, which obviously isn’t a great look for any bank.”

These three strikes are: the collapse of Greensill Capital; the billions of dollars lost on Archegos Capital; and the mountain of debt it is struggling to offload from the troubled leveraged buyout of software company Citrix.

“What we’re seeing at the moment is there is a lot of fear now in markets, and that’s really accelerated in this market compared to the GFC,” Mr Murphy noted.

“People are comparing Credit Suisse to Lehman Brothers.

“I don’t think it is, I don’t think Credit Suisse will collapse.

“I think if governments and/or investors are required to come in and provide the bank with more capital, they’ll do so.”