Critical moments. Credit Suisse shares hit record low, on track for its biggest ever annual drop

Credit Suisse Group AG hit a fresh record low after attempts to reassure markets of its financial stability only added to the sense of turmoil surrounding the troubled Swiss bank. 

The shares dropped as much as 12 per cent in Zurich trading on Monday to 3.52 francs. The bank has lost about 60 per cent of its market value this year alone and is on track for the biggest ever annual drop in its history. 

CEO Ulrich Koerner had sought to calm employees and the markets over the weekend after the stock touched a record low and credit-default swaps climbed last week. While touting the bank’s capital levels and liquidity, he acknowledged that the firm was facing a “critical moment” as it worked towards its latest overhaul plans. 

He also told employees that he will be sending them regular updates until the firm announces the new strategic plan on October 27 because of the speculation surrounding the lender. At the same time, Credit Suisse again sent around talking points to executives dealing with clients who brought up the credit default swaps, according to sources.

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The cost of insuring the firm’s bonds against default climbed about 15 per cent last week to levels not seen since 2009. Some clients have used the rise in the bank’s CDS this year to ask questions, negotiate prices or use competitors, the sources said.

Koerner, named CEO in late July, has had to deal with market speculation, banker exits and capital doubts as he seeks to set a path forward. The lender is currently finalizing plans that will likely see sweeping changes to its investment bank and may include cutting thousands of jobs over a number of years, Bloomberg has reported. 

Koerner’s memo was the second straight Friday missive as speculation over the beleaguered bank’s future increases. Analysts at KBW estimated that the firm may need to raise 4 billion Swiss francs ($4 billion) of capital even after selling some assets to fund any restructuring, growth efforts and any unknowns. 

Credit Suisse’s market capitalization dropped to around 9.5 billion Swiss francs, meaning any share sale would be highly dilutive to longtime holders. The market value was above 30 billion francs as recently as March 2021. 

Bank executives noted that the firm’s 13.5 per cent CET1 capital ratio on June 30 was in the middle of the planned range of 13 per cent to 14 per cent for 2022. The firm’s 2021 annual report said that its international regulatory minimum ratio was 8 per cent, while Swiss authorities required a higher level of about 10 per cent. 

The five-year credit default swaps price of about 250 basis points is up from about 55 basis points at the start of the year and is near their highest on record. While these levels are still far from distressed and are part of a broad market selloff, they signify deteriorating perceptions of creditworthiness for the scandal-hit bank in the current environment.

Drawing comparisons

The KBW analysts were the latest to draw comparisons to the crisis of confidence that shook Deutsche Bank AG six years ago. Then, the German lender was facing broad questions about its strategy as well as near-term concerns about the cost of a settlement to end a US probe related to mortgage-backed securities. Deutsche Bank saw its credit-default swaps climb, its debt rating downgraded and some clients step back from working with it.

The stress eased over several months as the German firm settled for a lower figure than many feared, raised about 8 billion euros ($7.8 billion) of new capital and announced a strategy revamp. Still, what the bank called a “vicious circle” of declining revenue and rising funding costs took years to reverse.

There are differences between the two situations. Credit Suisse doesn’t face any one issue on the scale of Deutsche Bank’s $7.2 billion settlement, and its key capital ratio of 13.5 per cent is higher than the 10.8 per cent that the German firm had six years ago.

The stress Deutsche Bank faced in 2016 resulted in the unusual dynamic where the cost of insuring against losses on the lender’s debt for one year surpassed that of protection for five years. Credit Suisse’s one-year swaps are still significantly cheaper than five-year ones. 

Last week, Credit Suisse said it’s working on possible asset and business sales as part of its strategic plan, which will be unveiled at the end of October. The bank is exploring deals to sell its securitized products trading unit, is weighing the sale of its Latin American wealth management operations excluding Brazil, and is considering reviving the First Boston brand name, Bloomberg has reported.