At its peak in 2006, Credit Suisse had a market capitalisation of over 81 billion Swiss francs. To put this in perspective, today that would put the bank in the top ten largest companies in Switzerland. Today, Credit Suisse no longer exists as its own bank and is instead part of UBS group, another large Swiss bank, since its dramatic collapse and subsequent acquisition in 2023. We often talk about the risk of bail-in presented by banks and the collapse of Credit Suisse is a good reminder of the importance of robust credit analysis as even some of the largest banks aren’t too big to fail.
Starting with a bit of history, in 2006 Credit Suisse enjoyed a comfortable position as one of the leading global financial institutions with a strong presence across Europe, USA, and Asia. Competing with regional rivals such as UBS and even other international banking giants, the bank was one of the few financial institutions to weather the storm that was the 2008 financial crisis reasonably well. It was one of the few banks that did not require a bailout due to better capitalisation and lower exposure to toxic subprime mortgages compared to other peers at the time.
This, unfortunately, was the high point for the bank which was then involved in scandals and mismanagement over the next decade. The leadership turnover was particularly fast, leading to inconsistent strategies which were exacerbated by scandals including tax evasion, fraud, competition probes, risk management failures, and even spying.
Of particular concern to investors, and therefore Arlingclose’s credit team, were the risk management issues. By December 2018 Credit Suisse’s Credit Default Swap price had started to diverge from other regional banks and was the highest on the list of Arlingclose’s monitored European banks. At this time Credit Suisse was removed from our suggested counterparty list amidst concerns over the volatility and uncertainty of the bank’s funding streams due to its large investment banking presence.
Despite these warning signs, Credit Suisse went on to have its A rating confirmed by Fitch in October 2020 and its A1 rating upgraded to Aa3 by Moody’s in December 2020 after weathering the initial impact of the Covid-19 pandemic and global lockdowns. While Moody’s cited the bank’s stable earnings and lower risk profile in the update, they also pointed to the inherent “volatility and risk opacity” of the bank’s riskier business segment but believed this was offset by Credit Suisse’s strong capitalisation.
Throughout 2021 Credit Suisse’s high-risk book of investments began to unwind with the collapse of Archegos Capital and Greensill Capital in 2021, both of which Credit Suisse was heavily invested in which led to severe losses and increased legal scrutiny from shareholders around the bank’s involvement in these two firms. These losses put a significant dent in confidence and led to sustained outflows over the next two years despite business restructuring.
The bank was tipped over the edge in 2023 following the collapse of Silicon Valley Bank in the USA. Credit Suisse announced it had found ‘material weakness’ in its financial reporting and its largest shareholder (Saudi National Bank) stated it would not invest any more funds due to regulatory reasons. Despite support offered by the Swiss government, this was too big a blow to confidence and Credit Default Swap prices soared to well over 1000 basis points when other European banks were sitting comfortably around the 50 mark. Shortly after, the bank officially collapsed and was acquired by rival Swiss group, UBS.
The acquisition was originally seen as a credit negative for UBS who had acquired a large book of relatively risky debt albeit on quite advantageous financial terms. Rating agencies initially affirmed the ratings of UBS but revised its outlook to negative due to the higher risk associated with the merger but noted that it had potential in due course to enhance the UBS franchise.
More recently, it seems as though UBS has had success in stabilising the Credit Suisse franchise with debt ratings being upgraded by ratings agencies in May 2024 . The combined group benefits from substantial economies of scale and a powerful position in the domestic Swiss market which is reflected in their share price which, after a brief drop in March 2023 following the acquisition of Credit Suisse, has bounced back and grown by 45%.
Operational risks still exist, and UBS’ profitability did take a hit in the acquisition but should things continue along their current course, the bank seems poised to recover the profitable parts of Credit Suisse’s franchise and create new synergies as the full merger of the business is finalised later in 2024.
Lots of important lessons to learn from the rise and fall of Credit Suisse.
If you would like to know more about Arlingclose’s credit analysis process, please get in touch by emailing info@arlingclose.com.
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