Credit Suisse CEO seeks to calm as default swaps near level seen in 2009

Credit Suisse Group CEO Ulrich Koerner reassured staff that the bank has a "strong capital base and liquidity position". PHOTO: REUTERS

ZURICH - Credit Suisse Group's new chief has asked investors for less than 100 days to deliver a new turnaround strategy.

Turbulent markets are making that feel like a long time. The cost of insuring the firm's bonds against default climbed about 15 per cent last week to levels not seen since 2009 as the shares touched a new record low.

On Friday, chief executive Ulrich Koerner reassured staff that the bank has a "strong capital base and liquidity position" and told them that he will be sending them a regular update until the firm announces a new strategic plan on Oct 27.

Mr Koerner, who was 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 for the troubled Swiss bank.

The lender is currently finalising 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.

Mr 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 four billion Swiss francs (S$5.8 billion) of capital, even after selling some assets to fund any restructuring, growth efforts and any unknowns.

Credit Suisse's market capitalisation dropped to around 10 billion Swiss francs, meaning any share sale would be highly dilutive to long-time holders. The market value was above 30 billion francs as recently as March 2021.

Credit Suisse executives have noted that the firm's 13.5 per cent common equity tier 1 capital ratio at 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 its international regulatory minimum ratio was 8 per cent, while the 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 2022 and is near their highest on record. While these levels are still far from distressed and are part of a broad market sell-off, they signify deteriorating perceptions of creditworthiness for the scandal-hit bank in the current environment.

The KBW analysts were the latest to draw comparisons to the crisis of confidence that shook Deutsche Bank 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 United States 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 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 does not face any one issue on the scale of Deutsche Bank's US$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 that 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 is working on possible asset and business sales as part of the strategic plan that will be unveiled at the end of October.

The bank is exploring deals to sell its securitised 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. BLOOMBERG

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