Failure or Sale? How things could continue for the ailing Credit Suisse

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

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

It comes after The Financial Times reports Friday that UBS is in talks to acquire all or part of Credit Suisse, citing several people involved in the talks. Neither bank commented on the report when contacted by CNBC.

According to FT, the Swiss National Bank and its regulator Finma are behind the negotiations aimed at boosting confidence in the Swiss banking sector. The banks Stocks listed in the US were around 7% higher in after-hours trading early Saturday.

Credit Suisse is currently undergoing a massive strategic overhaul aimed at restoring stability and profitability after a litany of losses and scandals, but markets and stakeholders still appear unconvinced.

Stocks fell again on Friday, posting their worst weekly decline since the coronavirus pandemic broke out. They failed to hold Thursday’s gains, which followed the announcement that Credit Suisse would access a loan of up to 50 billion Swiss francs ($54 billion) from the central bank.

Credit Suisse lost about 38% of its deposits in the fourth quarter of 2022 and earlier this week said in its belated annual report that outflows have yet to reverse. The company reported a net loss of 7.3 billion Swiss francs for the full year in 2022 and expects another “significant” loss in 2023 before returning to profitability next year when the restructuring begins to bear fruit.

This week’s news is unlikely to have changed the minds of depositors considering withdrawing their money. Meanwhile, credit default swaps, which insure bondholders against a company’s default, surged to new record highs this week.

According to the CDS rate, the bank’s default risk has risen to crisis levels, with the 1-year CDS rate jumping almost 33 percentage points to 38.4% on Wednesday, before closing at 34.2% on Thursday.

UBS sale?

There has long been talk of part – or all – of Credit Suisse being acquired by a domestic competitor UBSwhich has a market cap of around $60 billion versus its ailing compatriot’s $7 billion.

JPMorgan’s Kian Abouhossein called a takeover “the more likely scenario, particularly by UBS.”

In a note on Thursday, he said a sale to UBS would likely result in: an IPO or spin-off of Credit Suisse’s Swiss bank to avoid “too much concentration risk and market share control in the Swiss domestic market”; the closure of his investment bank; and retaining the wealth management and asset management businesses.

Both banks are reportedly opposed to the idea of ​​a forced merger, although this week’s events may well have changed that.

Bank of America strategists on Thursday noted that Swiss authorities may favor a consolidation between Credit Suisse’s national flagship bank and a smaller regional partner, as any combination with UBS could create “too big a bank for the country.”

“Proper Resolution” required

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

Barry Norris, CEO of Argonaut Capital, which holds a short position in Credit Suisse, stressed the importance of a smooth outcome.

“The whole bank is essentially in a resolution, and whether that resolution is orderly or disorderly is a debate right now, but neither creates value for shareholders,” he told CNBC’s Squawk Box Europe on Friday.

European bank stocks have suffered sharp falls during the recent Credit Suisse saga, underscoring market concerns about contagion given the sheer size of the 167-year-old institution.

The sector was rocked earlier in the week by the collapse of Silicon Valley Bank, the biggest since Lehman Brothers, along with the closure of New York-based Signature Bank.

In terms of scale and potential impact on the global economy, however, these companies pale in comparison to Credit Suisse, which, at around 530 billion Swiss francs at the end of 2022, has a balance sheet about twice the size of Lehman Brothers when it collapsed. It’s also much more globally connected, with several international subsidiaries.

“I think in Europe the battleground is Credit Suisse, but if Credit Suisse has to run down its balance sheet in a disorderly manner, these problems will spread to other financial institutions in Europe and also beyond the banking sector, particularly I think commercial real estate and individuals Equity, which I think are also vulnerable to what’s going on in the financial markets right now,” Norris warned.

The importance of an “orderly solution” was confirmed by Andrew Kenningham, chief economist for Europe at Capital Economics.

“As a global systemically important bank (or GSIB), it will have a resolution plan, but those plans (or living wills) have not been tested since they were put in place during the global financial crisis,” Kenningham said.

“Experience shows that a quick resolution can be achieved without causing too much contagion, provided authorities act decisively and senior debtors are protected.”

He added that while regulators are aware, as the intervention by the SNB and Swiss regulator FINMA showed on Wednesday, the risk of a “missed resolution” will worry markets until a long-term solution to the bank’s problems is found be clear.

Central banks provide liquidity

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

Oxford Economics said in a note on Friday that it would not include a financial crisis in its baseline as it would require systemic credit or liquidity problems. The forecaster currently sees the problems at Credit Suisse and the SVB as “a collection of different peculiarities”.

“The only general problem we can deduce at this point is that banks – all of which have been forced to hold large amounts of government debt against their volatile deposits – may be sitting on unrealized losses on these high quality bonds as yields have risen are. ‘ said Lead Economist Adam Slater.

“We know that for most banks, including Credit Suisse, exposure to higher yields has been largely hedged. So it’s difficult to spot a systemic problem unless it’s being driven by some other factor that we’re not yet aware of.”

Nonetheless, Slater noted that “fear itself” can trigger a flight by depositors, which is why it will be crucial for central banks to provide liquidity.

The US Federal Reserve was quick to set up a new facility after the SVB collapse and protected depositors, while the Swiss National Bank has signaled it will continue to support Credit Suisse, with proactive engagement from the European Central Bank and the Bank of England as well .

“So the most likely scenario is that central banks remain vigilant and provide liquidity to help the banking sector through this episode. That would mean a gradual easing like the UK LDI pension episode late last year,” Slater suggested.

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

“Furthermore, this is the third ‘one off’ issue within a few months following the UK gilt market crisis in September and the collapse of US regional banks last week, so it would be foolish to assume that no further issues will arise down the road,” he concluded .

— CNBC’s Darla Mercado contributed to this report