Banking experts predict what might happen next

Credit Suisse may have received one liquidity lifeline from the Swiss National Bankbut analysts are still evaluating the embattled lender’s forecast, weighing the possibility of a sale and whether it is truly “too big to fail.”

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

It comes after It was reported by the Financial Times Friday it UBS negotiations are underway to take over all or part of Credit Suisse, citing several people involved in the discussions. Neither bank commented on the report when contacted by CNBC.

According to the FT, the Swiss central bank and its regulator Finma are behind the negotiations, which aim to increase confidence in the Swiss banking sector. The banks US-listed stocks was about 7% higher in after-hours trading early Saturday.

Credit Suisse is undergoing a massive strategic review aimed at restoring stability and profitability after a litany of losses and scandalsbut markets and stakeholders still seem unconvinced.

The stock fell again on Friday to record its worst weekly decline since the start of the corona pandemic, without holding on Thursday’s winnings which followed an announcement that Credit Suisse would access a loan of up to 50 billion Swiss francs ($54 billion) from the central bank.

Credit Suisse lost around 38% of its deposits in the fourth quarter of 2022 and revealed in its delayed annual report earlier this week that outflows have still not reversed. It reported a full-year net loss of 7.3 billion Swiss francs for 2022 and expects a further “relevant” loss in 2023, before returning to profitability next year as restructuring begins to bear fruit.

This week’s news feed is unlikely to have changed the minds of depositors considering withdrawing their money.

Meanwhile, credit swaps, which insures bondholders against a company going bankrupt, 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 jumping nearly 33 percentage points to 38.4% on Wednesday, before ending Thursday at 34.2%.

UBS sale?

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

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

In a statement on Thursday, he said a sale to UBS would likely lead to: The 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 its investment bank; and retain its wealth management and asset management divisions.

Both banks are said to be opposed to the idea of ​​a forced tie-up, although this week’s events could well have changed that.

Vincent Kaufmann, CEO of Ethos, a foundation representing shareholders owning more than 3% of Credit Suisse shares, 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 very high systemic risk for Switzerland and also create a dangerous monopoly for Swiss citizens,” he added.

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

An “orderly resolution” is needed

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

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

“The whole bank is basically in a wind-down and whether that wind-down is orderly or disorderly is the debate at the moment, but neither is creating shareholder value,” he told CNBC’s “Squawk Box Europe” on Friday.

European bank shares have suffered steep declines amid the latest Credit Suisse saga, highlighting market concerns about contagion given the scale of the 167-year-old institution.

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

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

“I think the battleground in Europe is Credit Suisse, but if Credit Suisse has to unwind its balance sheet in a disorderly manner, these problems will spread to other financial institutions in Europe and also outside the banking sector, particularly I’m thinking of commercial real estate and private equity, which also appear to be vulnerable to what’s happening in the financial markets right now,” Norris warned.

The importance of an “orderly resolution” was reiterated by Andrew Kenningham, 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 put to the test since they were introduced during the global financial crisis,” Kenningham said.

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

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

Central banks to provide liquidity

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

Oxford Economics said in a statement on Friday that it does not incorporate a financial crisis into its baseline scenario, as that would require systemic problematic credit or liquidity issues. At the moment, the forecaster sees the problems at Credit Suisse and SVB as “a collection of different idiosyncratic issues.”

“The only general problem we can conclude at this stage is that banks – all of which have had to hold large amounts of government debt against their volatile deposits – may be sitting on unrealized losses on these high-quality bonds when interest rates have risen,” the chief economist said Adam Slater.

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

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

The American Federal Reserve moved quickly to establish a new facility and protect depositors in the wake of the SVB collapse, while Swiss National Bank have signaled that they will continue to support Credit Suisse, with proactive engagement also coming from European Central Bank and that Bank of England.

“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 of tensions as in LDI pension episode in the UK late last year,” Slater suggested.

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

“Furthermore, this is the third ‘one-off’ problem in a few months, following the UK stock market crisis in September and the US regional bank failures last week, so it would be foolish to assume that there won’t be other problems that will abate . the way,” he concluded.

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