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At Credit Suisse, sinking stocks are triggering caution signal

Credit Suisse Group AG’s credit rating hit a record high while its stock hit a new low, adding to the confusion after the bank’s failed attempts to reassure markets about its financial stability. 

Five-year credit default swaps, at about 293 basis points, are up from about 55 basis points earlier in the year and are at an all-time high, according to ICE Data Services. Shares fell as much as 12% in Zurich on Monday and have lost about 60% this year alone, on track for the biggest annual decline in Credit Suisse’s history. 

At first, CEO Ulrich Koerner tried to reassure workers and the market over the weekend, but saw his carefully worded memo backfire. Referring to the bank’s capital levels and liquidity, he admitted that the company was facing a “critical moment” as it worked towards its latest review. 
He also told his employees that he would send them regular updates until the company unveils a new strategic plan on October 27. Credit Suisse has again sent call points to executives dealing with clients who have acquired credit default swaps.

While the level of credit default swaps is far from distress and part of a broad market sell-off, it represents a deterioration in the scandal-plagued bank’s creditworthiness in the current environment. There is currently a 23% chance that the bank will default on its bonds within five years. Some clients have used the increase in CDS this year to ask questions, negotiate prices, or take advantage of competitors, the people said, speaking on condition of anonymity to discuss confidential discussions. 

Credit Suisse declined to comment through a company spokesman. A number of prominent figures took to Twitter over the weekend to debunk some of the rumors surrounding KDS as “fear giants.” Boaz Weinstein, head of Saba Capital Management, tweeted “take a deep breath” and compared the situation to when Morgan Stanley’s CDS doubled in 2011 and 2012. 

Koerner, who was appointed CEO in late July, had to deal with market speculation, bank exits, and doubts as he tried to pave the way forward. Bloomberg reported that the lender is currently finalizing plans that are likely to see sweeping changes to its investment bank and could include thousands of job cuts over several years, Bloomberg reported. 

Koerner’s note was the second note sent on Friday amid speculation about future hikes in the tight bank. KBW analysts estimate the company may need to raise billions of Swiss francs ($1 billion) in capital even after selling some assets to finance restructuring, growth efforts, and unknowns. Credit Suisse’s market capitalization fell to around 9.5 billion Swiss francs, meaning any share sale would be highly dilutive for long-term holders.

The market capitalization was still more than 30 billion francs in March 2021. Bank officials noted that the company’s capitalization ratio of 13.5 percent was forecast at 13 percent by 2022 on June 30. The company’s 2021 annual report noted that its international minimum rate was 8%, while Swiss authorities required a higher level of around 10%. KBW analysts made the latest comparisons to the crisis of confidence that shook Deutsche Bank AG six years ago.

The German lender then faced wide-ranging questions about its strategy, as well as looming concerns about the cost of ending its investigation into US mortgage-backed securities. Deutsche Bank’s credit default swaps rose, its debt rating was downgraded, and some clients withdrew from the business as a result. 

The stress has eased for several months as the German company settled for lower numbers than many had feared, raised about 8 billion euros ($7.8 billion) in new capital, and announced a strategic overhaul. However, it took the bank years to reverse the “vicious cycle” of declining revenues and rising financing costs. 

There are differences between these two situations. Credit Suisse has no problem with the scale of Deutsche Bank’s $7.2 billion payout, and its core capital ratio of 13.5 percent is up from the German firm’s 10.8 percent six years ago. 

The stress faced by Deutsche Bank in 2016 led to an unusual dynamic where the cost of the lender’s one-year non-life insurance exceeded that of the five-year guarantee. Credit Suisse’s one-year swaps are still significantly cheaper than five-year swaps. 

The expansion of Credit Suisse Group CDS by 2 basis points: 12 Signals After 16 Sep Last week, Credit Suisse said it was pursuing potential asset and business sales as part of its strategic plan announced at the end of October. Bloomberg reported that the bank is exploring deals to sell its securitization business unit, is considering selling its investment management business in Latin America excluding Brazil, and is considering reviving the First Boston brand.

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