Banking experts predict what could occur next

Credit Suisse can have received a liquidity lifeline from the Swiss National Bank, but analysts are still assessing the embattled lender’s prognosis, weighing the choice of a sale and whether it’s indeed “too big to fail.”

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

It comes after the Financial Times reported Friday that UBS is in talks to take over all or a part of Credit Suisse, citing multiple people involved within the discussions. Neither bank commented on the report when contacted by CNBC.

In accordance with the FT, the Swiss National Bank and Finma, its regulator, are behind the negotiations, that are geared toward boosting confidence within the Swiss banking sector. The bank’s U.S.-listed shares were around 7% higher in after-hours trading early Saturday.

Credit Suisse is undergoing a large strategic overhaul geared toward restoring stability and profitability after a litany of losses and scandals, but markets and stakeholders still appear unconvinced.

Shares fell again on Friday to register their worst weekly decline for the reason that onset of the coronavirus pandemic, failing to carry on to Thursday’s gains which followed an announcement that Credit Suisse would access a loan of as much as 50 billion Swiss francs ($54 billion) from the central bank.

Credit Suisse lost around 38% of its deposits within the fourth quarter of 2022, and revealed in its delayed annual report earlier this week that outflows are still yet to reverse. It reported a full-year net lack of 7.3 billion Swiss francs for 2022 and expects an extra “substantial” loss in 2023, before returning to profitability next yr because the restructure begins to bear fruit.

This week’s news flow is unlikely to have modified the minds of depositors considering pulling their money.

Meanwhile, credit default swaps, which insure bondholders against an organization defaulting, soared to latest record highs this week. In accordance with the CDS rate, the bank’s default risk has surged to crisis levels, with the 1-year CDS rate jumping by almost 33 percentage points to 38.4% on Wednesday, before ending Thursday at 34.2%.

UBS sale?

There has long been chatter that parts — or all — of Credit Suisse could possibly be acquired by domestic rival UBS, which boasts a market cap of around $60 billion to its struggling compatriot’s $7 billion.

JPMorgan’s Kian Abouhossein described a takeover “because the more likely scenario, especially by UBS.”

In a note Thursday, he said a sale to UBS would likely result in: The IPO or spinoff of Credit Suisse’s Swiss bank to avoid “an excessive amount of concentration risk and market share control within the Swiss domestic market”; the closure of its investment bank; and retention of its wealth management and asset management divisions.

Each banks are reportedly against the concept of a forced tie-up.

BlackRock, meanwhile, denied an FT report Saturday that it’s preparing a takeover bid for Credit Suisse. “BlackRock shouldn’t be participating in any plans to accumulate all or any a part of Credit Suisse, and has little interest in doing so,” an organization spokesperson told CNBC Saturday morning.

Vincent Kaufmann, CEO of Ethos, a foundation that represents shareholders holding greater than 3% of Credit Suisse stock, told CNBC that its preference was “still to have a spin-off and independent listing of the Swiss division of CS.”

“A merger would pose a really high systemic risk for Switzerland and likewise create a dangerous Monopoly for the Swiss residents,” he added.

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

‘Orderly resolution’ needed

The pressure is on for the bank to achieve an “orderly” solution to the crisis, be that a sale to UBS or another choice.

Barry Norris, CEO of Argonaut Capital, which has a brief position in Credit Suisse, stressed the importance of a smooth consequence.

“The entire bank is in a wind-down essentially and whether that wind-down is orderly or disorderly is the talk in the mean time, none of which though creates value for shareholders,” he told CNBC’s “Squawk Box Europe” on Friday.

European banking shares have suffered steep declines throughout the newest Credit Suisse saga, highlighting market concerns in regards to the contagion effect given the sheer scale of the 167-year-old institution.

The sector was rocked in the beginning of the week by the collapse of Silicon Valley Bank, the biggest banking failure since Lehman Brothers, together with the shuttering of Latest York-based Signature Bank.

Yet by way of scale and potential impact on the worldwide economy, these firms pale compared to Credit Suisse, whose balance sheet is around twice the dimensions of Lehman Brothers when it collapsed, at around 530 billion Swiss francs as of end-2022. Additionally it is much more globally inter-connected, with multiple international subsidiaries.

“I believe in Europe, the battleground is Credit Suisse, but when Credit Suisse has to unwind its balance sheet in a disorderly way, those problems are going to spread to other financial institutions in Europe and likewise beyond the banking sector, particularly I believe into industrial property and personal equity, which also look to me to be vulnerable to what is going on on in financial markets in the mean time,” Norris warned.

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

“As a Global Systemically Essential Bank (or GSIB) it can have a resolution plan but these plans (or ‘living wills’) haven’t been put to the test since they were introduced in the course of the Global Financial Crisis,” Kenningham said.

“Experience suggests that a fast resolution may be achieved without triggering an excessive amount of contagion provided that the authorities act decisively and senior debtors are protected.”

He added that while regulators are aware of this, as evidenced by the SNB and Swiss regulator FINMA stepping in on Wednesday, the chance of a “botched resolution” will worry markets until a long-term solution to the bank’s problems becomes clear.

Central banks to supply liquidity

The most important query economists and traders are wrestling with is whether or not Credit Suisse’s situation poses a systemic risk to the worldwide banking system.

Oxford Economics said in a note Friday that it was not incorporating a financial crisis into its baseline scenario, since that may require systemic problematic credit or liquidity issues. For the time being, the forecaster sees the issues at Credit Suisse and SVB as “a set of various idiosyncratic issues.”

“The one generalised problem that we will infer at this stage is that banks – who’ve all been required to carry large amounts of sovereign debt against their flighty deposits – could also be sitting on unrealised losses on those high-quality bonds as yields have risen,” said Lead Economist Adam Slater.

“We all know that for many banks, including Credit Suisse, that exposure to higher yields has largely been hedged. Subsequently, it’s difficult to see a systemic problem unless driven by another factor of which we are usually not yet aware.”

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

The U.S. Federal Reserve hurried to ascertain a latest facility and protect depositors within the wake of the SVB collapse, while the Swiss National Bank has signaled that it can proceed to support Credit Suisse, with proactive engagement also coming from the European Central Bank and the Bank of England.

“So, the probably scenario is that central banks remain vigilant and supply liquidity to assist the banking sector through this episode. That will mean a gradual easing of tensions as within the LDI pension episode within the U.K. late last yr,” Slater suggested.

Kenningham, nevertheless, argued that while Credit Suisse was widely seen because the weak link amongst Europe’s big banks, it shouldn’t be the just one to struggle with weak profitability lately.

“Furthermore, that is the third ‘one-off’ problem in a number of months, following the UK’s gilt market crisis in September and the US regional bank failures last week, so it might be silly to assume there will likely be no other problems coming down the road,” he concluded.

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