Credit Suisse chief Ulrich Koerner steps in to reassure markets as default swaps climb

The lender is finalising plans that could lead to sweeping changes to its investment bank and thousands of jobs losses over a number of years

Credit Suisse's headquarters in Zurich. Chief executive Ulrich Koerner has a 100-day turnaround in mind. Reuters
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Credit Suisse Group's new chief executive has asked investors for fewer than 100 days to deliver a turnaround strategy. Turbulent markets are making that feel like a long time.

The cost of insuring the company’s bonds against default climbed about 15 per cent last week to levels not reported since 2009 while its shares touched a record low.

On Friday, Ulrich Koerner reassured staff that the bank had a “strong capital base and liquidity position” and told employees that he would be sending them a regular update until the company announces a new strategic plan on October 27.

Mr Koerner, who was appointed 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 finalising plans that could involve sweeping changes to its investment bank and may include cutting thousands of jobs over a number of years, Bloomberg reported.

Mr Koerner’s memo was the second Friday missive in a row as speculation over the bank’s future increases.

Analysts at KBW estimated that the company may need to raise 4 billion Swiss francs ($4bn) in capital even after selling some assets to fund any restructuring, growth efforts and any unknowns.

Credit Suisse’s market capitalisation dropped to about 10bn Swiss francs, meaning any share sale would be highly dilutive to longtime holders. The market value was above 30bn francs as recently as March 2021.

Credit Suisse executives have noted that the company’s 13.5 per cent Common Equity Tier-1 (CET1) ratio at June 30 was in the middle of the planned range of 13 per cent to 14 per cent for 2022.

The company's 2021 annual report said that its international regulatory minimum ratio was 8 per cent, while Swiss authorities required a level of about 10 per cent.

The five-year credit default swaps price of about 250 basis points is up from about 55 bps at the start of the year and is near the 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 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 US investigation into mortgage-backed securities.

Deutsche Bank's credit-default swaps climbed, its debt rating was downgraded and some clients stepped back.

The stress eased over several months as the German lender settled for a lower figure than many feared, raised about €8bn ($7.8bn) in 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 $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 lender 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 swaps.

Updated: October 03, 2022, 4:50 AM
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