INTRODUCTION
As of the morning of April 26, 2021, Credit Suisse's stock price fell sharply in early trading, dropping by around 25% from the previous day's close. This drop followed reports over the weekend that the bank plans to announce significant losses related to its exposure to US-based hedge fund Archegos Capital Management, which recently suffered a dramatic margin call that led to significant losses across multiple financial institutions.
The reports indicate that Credit Suisse could face losses of several billion dollars due to its involvement with Archegos, which could have significant implications for the bank's financial health and raise questions about its risk management practices.I want to use this article to explain how we got to this point and potential losses, inference to both Credit Suisse and the wider banking community.
Credit Suisse's business model
Credit Suisse is a global financial institution that operates in the areas of private banking, investment banking, and asset management. The company's business model primarily generates revenue through fees, commissions, interest income, and trading activities. Credit Suisse offers a range of financial products and services, including advisory services, transaction banking, capital raising, and risk management.
The company derives its revenue from four segments: Swiss Universal Bank, International Wealth Management, Asia Pacific, and Investment Banking & Capital Markets. The Swiss Universal Bank segment primarily focuses on banking services to individuals and corporate clients in Switzerland, while the International Wealth Management segment serves individuals and institutional clients globally. The Asia Pacific segment operates in several Asian countries, including India, China, and Singapore, and serves clients across various sectors.
The Investment Banking & Capital Markets segment provides investment banking and capital market services, such as advisory on mergers and acquisitions, underwriting, and trading. This division focuses on serving institutional clients across different industries, including healthcare, consumer, and technology. Credit Suisse is one of the nine global "Bulge Bracket" banks providing services in investment banking and private banking; thus, any potential collapse will have huge cansquincess across the financial system.
Why have investors lost confidence in Credit Suisse?
Investors lost confidence in Credit Suisse due to several scandals and legal issues that have surfaced over the past few years. In particular, the bank has been embroiled in controversies about its failure to properly manage risk, including issues with its risk management systems and controls. As a result, the bank has faced significant losses and reputational damage.
In highlighting some specific events that led to investor loss of confidence include the 2015 Swiss franc devaluation, which resulted in significant losses for the bank, and the 2018 spy scandal, which involved the bank hiring investigators to spy on employees. The bank has also been accused of facilitating tax evasion and engaging in money laundering activities. Credit Suisse has also been criticised for its executive compensation practices, with investors expressing concern over high executive pay despite its poor financial performance. These issues have caused a decline in the bank's share price and a loss of investor confidence, leading to calls for increased accountability and reform within the organisation.
Credit Suisse delay its 2022 annual report after a 'late call' from the SEC, why?
In June 2022, Credit Suisse announced that it would be delaying the release of its 2022 annual report due to a "late call" from the US Securities and Exchange Commission (SEC). The SEC had requested additional information and materials from the bank related to its risk-management practices and controls, specifically in relation to its trading activities.
The delay in releasing the annual report is likely due to a more stringent approach by regulators toward banks' risk-management practices and the expectation that they strictly comply with the regulations. This additional scrutiny from regulators has become increasingly common in recent years following a series of high-profile financial scandals and crises. Credit Suisse has faced several regulatory issues in recent years, including its involvement in the Greensill Capital scandal mentioned earlier. Regulators have also fined the bank over its handling of property loans and for not properly disclosing information to clients.
The company eventually released its annual report on Tuesday. Still, the report was delayed due to questions the Securities and Exchange Commission (SEC) raised regarding the company's cash flow statements in 2019 and 2020. Upon releasing the report, the company disclosed weaknesses in its financial controls, which likely led to investors' concerns. As a result, the company's stock price fell after the report was released, indicating an adverse reaction from the market towards the company's financial situation.
Weaknesses in financial controls can suggest that a company is not properly managing its finances and expenditures, leading to various problems such as financial losses, decreased profits, and reputational damage. This led Credit Suisse management to try to acquire additional funding, to give investors confidence regarding the bank's solvency.
Why, Saudi National Bank (SNB) said it would be unable to stump up more cash for the beleaguered Swiss
One of these sources of funding was The Saudi National Bank (SNB). However, it stated that it could not provide additional funding to Credit Suisse due to regulatory restrictions imposed by the Saudi Arabian banking regulator, the Saudi Arabian Monetary Authority (SAMA). These restrictions limit the exposure Saudi Arabian banks, like SNB, can have to any foreign counterpart.
The credit risk exposure rules limit the amount of a Saudi bank's total equity that can be used for loans to any one foreign entity or group of affiliated companies to 25% of the bank's total equity. In Credit Suisse's case, the limit would have been exceeded, and therefore the SNB could not provide additional funds to the Swiss bank.
It is important to note that the SNB is not the only bank affected by these restrictions. Other banks that operate in Saudi Arabia also face similar restrictions when investing abroad, which limits their ability to support institutions such as Credit Suisse.
Given the magnitude of Credit Suisse's financial challenges and concerns about its risk management practices, additional funding from investors, particularly Middle Eastern investors, was seen as a way for the bank to shore up its finances. However, in this case, regulatory constraints prevented SNB from providing additional funding, prompting Credit Suisse to explore alternative capital-raising measures.
Credit Suisse's potential plans for a fresh capital raise and the possibility of the investment bank withdrawing from the US market.
The fact that the bank is reportedly seeking to raise additional capital reflects its serious financial challenges, especially in light of its recent losses related to Greensill Capital and Archegos Capital. If pursued, withdrawing the investment bank from the US market would represent a significant strategic shift for Credit Suisse. It could have significant implications for its future profitability and growth prospects.
Investors will undoubtedly monitor the situation with interest, as the bank's financial health and strategic direction could affect the broader financial industry. It is worth noting, however, that these are only reports, and it remains to be seen whether Credit Suisse will ultimately decide to pursue a fresh capital raise or withdraw from the US market. As such, investors must stay attuned to further developments as they emerge to make informed decisions about their investments.
What happens if Credit Suisse can't raise fresh capital and the possibility of the investment bank withdrawing from the US market comes true? What is the impact on the global financial system?
If Credit Suisse is unable to raise fresh capital successfully and decides to withdraw its investment bank from the US market, there could be significant implications for the global financial system.
The potential withdrawal of Credit Suisse's investment bank from the US could have broad implications for the global financial system. Credit Suisse is a significant player in global financial markets, so any significant changes to the bank's operations or strategic direction could impact market confidence and stability worldwide.
If Credit Suisse is unable to raise fresh capital, there could be a knock-on effect on other financial institutions that have exposure to the bank. Investors could become more concerned about Credit Suisse's financial health and risk management practices, leading to increased risk aversion and potentially causing a ripple effect throughout the financial system.
It is essential to monitor the situation with Credit Suisse closely. Any significant changes to the bank's operations or financial health could affect the broader financial industry and the global economy. This also comes off the back of the collapse of SVB, and the current implications of FED rate policy are having on regional banks. Some in the FED could view the Credit Suisse issue as a welcome distraction. One thing is for sure the next couple of months are going to be very choppy indeed.