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Credit Suisse’s shares soared 30 per cent on Thursday after it announced it will move to shore up its finances by borrowing up to nearly $54 billion US from the Swiss central bank, bolstering confidence as fears about the banking system moved from the U.S. to Europe.
It was a massive swing from a day earlier, when shares of Switzerland’s second-largest commercial bank plunged 30 per cent on the SIX stock exchange after its biggest shareholder said it would not put more money into Credit Suisse.
That dragged down other European banks after the collapse of some U.S. banks stirred fears about the health of the global banks. Shares of France’s Societe Generale SA and BNP Paribas as well as Germany’s Deutsche Bank and Britain’s Barclays Bank all were up Thursday after big drops a day earlier.
The banking turmoil has cast a shadow over Thursday’s meeting of the European Central Bank. Before the chaos erupted, ECB head Christine Lagarde had said it was “very likely” that the bank would make a large, half-percentage point rate increase to tackle stubbornly high inflation.
After European bank shares plunged Wednesday, analysts said the meeting outcome was hard to predict, with some saying the central bank might dial back to a quarter-point increase. Higher rates fight inflation, but in recent days have fuelled concern that they may have caused hidden losses on bank balance sheets.
Speaking Wednesday at a financial conference in the Saudi capital of Riyadh, Credit Suisse chair Axel Lehmann defended the bank, saying, “We already took the medicine” to reduce risks.
Ruling out government assistance
When asked if he would rule out government assistance in the future, he said: “That’s not a topic…. We are regulated. We have strong capital ratios, very strong balance sheet. We are all hands on deck, so that’s not a topic whatsoever.”
Fanning new fears about the health of financial institutions following the recent collapse of Silicon Valley Bank and Signature Bank in the U.S., Credit Suisse’s share price hit a record low Wednesday.
It came after the Saudi National Bank told news outlets that it would not inject more money into the Swiss lender. The Saudi bank is seeking to avoid regulations that kick in with a stake above 10 per cent, having invested some 1.5 billion Swiss francs to acquire a holding just under that threshold.
The turmoil prompted an automatic pause in trading of Credit Suisse shares on the Swiss market and sent shares of other European banks tumbling, some by double digits. The stock has suffered a long, sustained decline: Now it’s trading at 2.10 Swiss francs (3.11 Cdn), while in 2007, it was at more than 80 francs ($118.6 Cdn) each.
As Switzerland’s central bank announced late Wednesday that it was prepared to act, regulators said they believed the bank had enough money to meet its obligations.
Previous losses
However, JPMorgan analysts said the loan from the Swiss National Bank would not be enough to soothe investor concerns and the “status quo was no longer an option,” leaving a takeover of Credit Suisse as the most likely outcome.
Credit Suisse has seen a steady stream of withdrawals from wealthy clients, which Luis Arenzana, founder of Shelter Island Capital Management, told Reuters was not “necessarily a panicky reaction to recent events in the U.S. alone.”
“CS has not earned its cost of equity since 2013. The bank has lost a cumulative 2.5 francs per share since. This is not the result of just one or two big one-offs as the bank reported a loss for five out of nine of those years,” Arenzana said.
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Credit Suisse reported earlier this week that managers had identified “material weaknesses” in the bank’s internal controls on financial reporting as of the end of last year. That fanned new doubts about the bank’s ability to weather the storm.
Credit Suisse is “a much bigger concern for the global economy” than the midsize U.S. banks that collapsed, said Andrew Kenningham, chief Europe economist for Capital Economics.
It has multiple subsidiaries outside Switzerland and handles trading for hedge funds.
He noted, however, that the bank’s “problems were well known so do not come as a complete shock to either investors or policymakers.”
‘Seen as the weakest link’
The troubles “once more raise the question about whether this is the beginning of a global crisis or just another ‘idiosyncratic’ case,” Kenningham said in a note. “Credit Suisse was widely seen as the weakest link among Europe’s large banks, but it is not the only bank which has struggled with weak profitability in recent years.”
Investors responded to “a broader structural problem” in banking following a long period of low interest rates and “very, very loose monetary policy,” said Sascha Steffen, professor of finance at the Frankfurt School of Finance & Management.
In order to earn some yield, banks “needed to take more risks, and some banks did this more prudently than others.”
European finance ministers said this week that their banking system has no direct exposure to the U.S. bank failures.
Europe strengthened its banking safeguards after the global financial crisis that followed the collapse of U.S. investment bank Lehman Brothers in 2008 by transferring supervision of the biggest banks to the central bank, analysts said.
