Banking experts predict what will happen next

Credit Suisse may have received a liquidity lifeline from the Swiss National Bank, but analysts are still assessing the troubled lender’s prognosis, weighing the option of a sale and assessing whether it really is “too big to fail”.

Credit Suisse’s management began crunch talks this weekend to assess “strategic circumstances” for the bank, Reuters reported, citing sources.

This comes later Financial Times reported UBS is in talks to take over all or part of Credit Suisse, citing multiple people involved in the discussions. Neither bank was available to comment on the report when contacted by CNBC.

According to the FT, the Swiss National Bank and its regulator, Finma, are behind talks aimed at boosting confidence in the Swiss banking sector. The bank’s US-listed shares were about 7% higher in early after-hours trading on Saturday.

Credit Suisse is undergoing a major strategic overhaul aimed at restoring stability and profitability after losses and scandals, but markets and shareholders are still unconvinced.

Stocks fell again on Friday to post their worst weekly decline since the start of the coronavirus pandemic, failing to hold on to Thursday’s gains, following an announcement by the central bank that Credit Suisse would take a loan of up to 50 billion Swiss francs ($54 billion).

Credit Suisse lost about 38% of its deposits in the fourth quarter of 2022, and revealed in its delayed annual report earlier this week that the outflows had yet to reverse. It has posted a full-year net loss of 7.3 billion Swiss francs for 2022 and expects a further “significant” loss in 2023, before returning to profitability next year as restructuring begins to bear fruit.

This week’s flow of news is unlikely to change depositors’ minds.

Meanwhile, debt default swaps, which insure bondholders against a company defaulting on a loan, rose to new record highs this week. According to the CDS rate, bank default risk has risen to crisis levels, with the 1-year CDS rate rising nearly 33 percentage points to 38.4% on Wednesday, from 34.2% on Thursday.

Is UBS selling?

There has long been talk that parts — or all — of Credit Suisse could be bought by domestic rival UBS, which has a market capitalization of about $60 billion to its struggling compatriot’s $7 billion.

JP Morgan’s Kian Apohossein described the acquisition as a “highly likely scenario, especially by UBS”.

In a note on Thursday, it said the sale to UBS could lead to an IPO or spinoff of Credit Suisse’s Swiss bank to avoid “higher concentration risk and market share control in the Swiss domestic market”; closing its investment bank; and retaining its wealth management and asset management divisions.

Although this week’s events may have changed that, both banks remain opposed to the idea of ​​a mandatory bond.

Vincent Kaufman, CEO of Ethos, a trust representing shareholders that owns more than 3% of Credit Suisse shares, told CNBC that it “still wants to have a spin-off and independent listing of CS’s Swiss arm.”

“The merger would pose a very high systemic risk to Switzerland and create a monopoly that would be dangerous for Swiss citizens,” he added.

Meanwhile, Bank of America strategists noted on Thursday that Swiss authorities may prefer a merger between Credit Suisse’s flagship domestic bank and a smaller regional partner, as any combination with UBS could create a “much bigger bank for the country.”

A ‘orderly resolution’ is required

The bank is under pressure to reach an “orderly” solution to the crisis, be it a sale to UBS or another option.

Barry Norris, CEO of Argonaut Capital, who has a short tenure at Credit Suisse, stressed the importance of a smooth finish.

“The whole bank is basically in a tailwind, and it’s a debate right now whether that tailwind is disorderly or disorderly, although none of that creates value for shareholders,” he told CNBC’s “Squawk Box Europe” on Friday.

European banking stocks have suffered steep declines throughout the recent Credit Suisse saga, highlighting market concerns about a contagion effect given the sheer size of the 167-year-old firm.

Earlier in the week, the collapse of Silicon Valley Bank, which shut down New York-based Signature Bank, rocked the sector in the biggest bank failure since Lehman Brothers.

However, in terms of size and potential impact on the global economy, these companies pale in comparison to Credit Suisse, whose balance sheet was twice as large when Lehman Brothers collapsed, at around 530 billion Swiss francs at the end of 2022. It is globally interconnected with many international subsidiaries.

“In Europe, I think the battleground is Credit Suisse, but if Credit Suisse has to unbundle its balance sheet, those problems will spread to other financial institutions in Europe and beyond the banking sector, especially I think commercial property and private equity, given what’s happening in the financial markets at the moment. “I’m vulnerable,” Norris warned.

The importance of “orderly resolution” was echoed by Andrew Cunningham, chief European economist at Capital Economics.

“As a global systemically important bank (or GSIB) it will have a resolution plan, but these plans (or ‘living wills’) have not been tested since they were introduced during the global financial crisis,” Cunningham said.

“Experience suggests that if the authorities act decisively and senior borrowers are protected, a quick resolution can be achieved without triggering more contagion.”

With the SNB and Swiss regulator FINMA stepping in on Wednesday, he said the risk of “failure to resolve” will worry markets, even if regulators are aware of this until a long-term solution to the bank’s problems becomes clear.

Central banks to provide liquidity

The biggest question economists and traders are wrestling with is whether Credit Suisse’s situation poses a systemic risk to the global banking system.

Oxford Economics, in a note on Friday, did not link the financial crisis to its underlying scenario because that would require systemic complex credit or liquidity problems. At the moment, the forecaster sees the problems at Credit Suisse and SVB as a “different set of unique problems”.

“The only general problem we can speculate at this point is that banks – forced to hold large amounts of sovereign debt against their volatile deposits – may have unrealized losses on those high-quality bonds as yields rise,” lead economist Adam Slater said.

“We know that for most banks, including Credit Suisse, high yields have largely been prevented. So it’s hard to see a systemic problem unless it’s driven by some other factor that we don’t yet know about.”

Despite this, Slater noted that “fear itself” will trigger depositor flights, which is why it will be important for central banks to provide liquidity.

The US Federal Reserve moved quickly to establish a new facility to protect depositors in the wake of the SVB collapse, while the Swiss National Bank has signaled it will continue to support Credit Suisse, and the European Central Bank and the Bank of England.

“Therefore, the most likely scenario is for central banks to remain vigilant and provide liquidity to help the banking sector through this episode, which will lead to a gradual easing of tensions similar to the LDI pension episode in the UK late last year,” suggested Slater.

However, Cunningham argued that while Credit Suisse is widely seen as the weakest link among Europe’s big banks, it is not the only one struggling with weak profitability in recent years.

“Furthermore, this is the third ‘one-off’ problem in a few months, following the UK gilt market crisis in September and the US regional bank failures last week, so it would be foolish to assume there won’t be another problem down the road,” he concluded.

— CNBC’s Katrina Bishop, Leonie Kidd and Darla Mercado contributed to this report.