Credit Suisse becomes toxic wasteland as contagion risks mount

Credit Suisse (SWX: CSGN) came under renewed strains on Wednesday as the company lost confidence of a key investor. In an interview, the head of Saudi National Bank warned that he will not provide more lifeline to the troubled bank. He cited the ongoing regulatory and statutory challenges. 

Credit Suisse has become a toxic wasteland

Saudi National Bank (SNB), like other Credit Suisse investors, have seen their investments evaporate in the past few years. In all, Credit Suisse stock has crashed to an all-time low having shed over 90% of its value from its peak in 2018.

SNB’s statement came at a difficult time for the global banking sector. In the past few days, banks like Silicon Valley Bank and Signature, have all failed in the United States. And there is an increased fear that we could see another banking crisis, as I wrote here. 

The statement came at a time when Credit Suisse is facing increased pressure. For example, data shows that the cost of insuring that the company will not default has jumped sharply in the past few weeks. On Wednesday, credit default swaps for one year jumped to over 1000 basis points. 

Also, like the bond market, these CDs have become deeply inverted, meaning that there is an immediate risk that the bank could default. In his statement, the head of Saudi’s SNB said:

“If we go above 10%, all new rules kick in whether it be by our regulator or the Swiss regulator or the European regulator. We’re not inclined to get into a new regulatory regime. I can cite five or six other reasons, but one reason is there is a glass ceiling and we’re not going to entertain going beyond it.”

Earlier this month, Harris Associates dumped its entire stake in Credit Suisse. It was the biggest investor in the company.

Credit Suisse crisis mounts

Credit Suisse is now implementing a robust turnaround that it hopes will help position it for the future. It expects that it will become profitable by either 2024 or 2025. However, as evidenced by the performance of its credit default swaps, there are concerns about whether the firm will last that long. 

In a statement this week, the company’s CEO said that the company was still positioned for a strong turnaround. He cited the fact that it has seen inflows in the past few weeks and the fact that its balance sheet is still robust. It has a CET ratio of 14.1%, which is higher than that of other European banks. 

However, in a statement on Tuesday, the company said that it found material weakness in its reporting for its 2021 reports. It is being investigated by the SEC, which forced it to postpone its annual report last week.

This crisis could lead to a bank run as we saw in the United States. If this happens, other high-street Swiss banks like UBS and Julius Baer stands to benefit.