Credit Switzerland. Are we facing a new Lehman Brothers?

 Credit Switzerland.  Are we facing a new Lehman Brothers?

By Lucas J. Botelho

After some calm, Credit Suisse returned to a new turbulent phase, following new rumors of its fragility. Investor skepticism has resulted in the bank’s shares falling 25% in recent days. Alarm sounded when the investment bank announced that it would carry out a cost-cutting operation worth 1.5 billion Swiss francs. At the same time, it announced a collective layoff of some 5,000 employees.

This is the financial institution’s response after revealing that it would need 4 billion Swiss francs to absorb the new restructuring costs, to bet on the growth of new business lines and to bolster the low level of capital.

This path does not seem easy for a bank that has shown a capitalization decline of 10 billion Swiss francs. Still, investing in low-risk investments and strengthening asset management seems to be the way forward.

On the other hand, the financial institution must focus on selling an asset portfolio that will provide the desired stability and according to financial analysts Keefe, Bruyette & Woods, quoted in the Financial Times, the restructuring costs should be much higher than what was announced by Credit Suisse.

“After this asset sale and if it were necessary to request more capital from investors on the order of CHF 14 billion to develop a growth plan, this request could lead to disputes, friction and fear among customers. “. The bank’s senior executives have already made it clear that raising capital will be their last resort. Customer distrust isn’t extraordinary given the instability it has faced in recent years.

Free fall Mário Martins, an analyst at ActivTrades, reminds me that the financial institution has faced controversy since 2021, but he believes that this is not the true origin of the problem, arguing that the difficulties date back to a further past, which started with the covid-19 pandemic. “In February 2020, Credit Suisse bonds were priced higher than competing UBS, but a year later, UBS bonds were worth 10% more than CS bonds.”

And this situation becomes clearer, according to Mário Martins, when we look at “securities from February 26, 2021 to now, with a CS share worth 4 Swiss francs today, while a UBS share is worth 15 francs”.

Henrique Tomé, an analyst at XTB, also admits that Credit Suisse’s shares “performed poorly due to the risk-out sentiment that characterized this year, hurting the valuations of publicly traded companies”.

And he recalls that, despite the current devaluations of securities, “the declines are not related to the bank’s difficult periods, but to the current economic situation”, citing as an example the devaluation observed in other banking institutions, such as Goldman Sachs, Citigroup, BNP PARIBAS for example.

As for the strategy to be implemented by the bank, the official guarantees that the financial institution has “protection and hedging mechanisms in place that make it possible to raise the necessary capital with the sale of assets”.

Mário Martins thinks otherwise when he states that it will only become difficult to sell assets. And in light of this scenario, he acknowledges that new bonds may need to be issued, “hence the depreciation of existing stocks, not least because it is not just a matter of filling a capital gap, but also to continue investing to generate income and avoid a recessive spiral.

Are we facing a new Lehman Brothers? There are those pointing to similarities regarding the collapse of Lehman Brothers, which triggered the subprime crisis in 2008. El Mundo, citing financial sources, speculates “that the investment bank will face great difficulties, but that the current situation of the sector is healthier and more stable compared to the last crisis”, the spillover effect that Credit Suisse could have on other institutions is less likely.

At i, the ActivTrades analyst excludes such a risk. “For now, there is no indication that a collapse of the same magnitude could occur, but there is a phase of greater needs stress, which will force strategic decisions that will penalize current shareholders in the near term.”

Henrique Tomé recalls that at the time, Lehman Brothers had “about 600 billion in assets before it went bankrupt”. And “Currently, Credit Suisse and Deutsche Bank together have $2,000 billion in assets — about 3.3 times more than Lehman at that time.”

He admits, however, that “since the last major financial crisis, Europe has implemented measures that require banks to meet certain requirements in order to guarantee liquidity and which are intended to cover the banks’ risk”, pointing out that Credit Suisse is a has liquidity coverage. ratio above 190%.

The scenario of uncertainty has been acknowledged by current CEO Ulrich Körner, who admitted to having been in contact with investors in an effort to assuage this successive loss of customers and the dwindling of the institution’s credibility.

succession The internal life of the bank has not been easy. António Horta Osório, the famous Portuguese banker, who received earnings after his restructuring of Llyods Bank in a period of deep crisis, was called to the lead in May 2021 to manage the crisis caused by the scandals of Greensill Capital and Archegos Capital Management, which cost the bank more than five billion dollars (more than 4.3 million euros).

The fall of Greensill was the first of two major problems in 2021, followed shortly after by the collapse of Archegos Capital Management, which had financed the Swiss bank with billions of euros.

However, in January of this year, he was forced to resign after breaching his obligation to comply with the Covid-19 quarantine for the second time after watching the tennis final at Wimbledon.

Ulrich Korner became chairman of the bank’s board of directors in July 2022 and suffered “one of the most tumultuous and turbulent periods in 166 years of Swiss banking history”, according to the Financial Times, with Credit Suisse posting a loss of 1.6 billion euros in the second quarter of this year.

Despite the circumstances, the CEO already has considerable experience, bearing in mind that he was already responsible for the bank’s asset management department before his appointment. And it is expected to continue its announced restructuring process of raising capital and lowering operating costs.

*Text edited by Sónia Peres Pinto