First days on the job can be tough but Dixit Joshi’s tops most. Credit Suisse’s new chief financial officer started on Monday after senior executives had spent the weekend telling clients, investors and counterparties that the bank was solvent.
Such reassurance can be spectacularly unsettling. It implies that someone somewhere thinks the business is in serious trouble. Credit Suisse shares fell 8 per cent when markets opened. Spreads on credit default swaps moved even higher. Its share valuation now lines up with Greek banks.
Markets are unforgiving at the best of times. As the UK government found out last week, they are ruthless during times of heightened fear. Credit Suisse has all the makings of an easy short.
Firstly, it has a chequered history, including losses from the Archegos and Greensill scandals. Secondly, there has been a revolving door of managers. The latest of these will not unveil their plans for almost a month. Form says it is difficult to give Credit Suisse the benefit of the doubt. But the banking system regulation today deserves greater trust.
If Credit Suisse is going bust, so, improbably, are Deutsche Bank and Commerzbank. Their CDS spreads also trade at or above highs of recent years. All banks have greater loss absorption capacity. Credit Suisse has SFr52.7bn ($53bn) of core and additional tier one capital or 19.2 per cent of risk-weighted assets. That covers losses from Archegos by almost 10-fold. The leverage ratio is 6.1 per cent or about half what it was in 2008. Liquidity reserves of SFr235bn comprise central bank assets, Swiss government bonds and US Treasuries.
Yet Credit Suisse may need more capital or lower risk weighted assets. If so, how much? The bank raised $10bn in 2015 but CET1 was lower back then at 10 per cent. Raising half of that today would likely need a steep discount and could leave shareholders facing a two-thirds dilution. Asset sales are another option. Global private banking assets of $800bn are worth at least 2 per cent of that, so could fetch $16bn.
Chief executive Ulrich Körner should bring forward a promised clean-up to assuage investor fears. The market’s message to Körner is: act now, not later.
Source: Financial Times