Is Credit Suisse Bank going the Lehman way…..
One of the biggest banks in the world is seeing a major slump in its stock price. Here’s why.
Credit Suisse is having a bad year. The shares of the 166-year-old Swiss bank have fallen over 56% in the last year!
Even the bank’s CFO has announced that it is at a “critical moment” for it.
So, what exactly went wrong at the legacy bank?
What’s Wrong with Credit Suisse?
Credit Suisse’s scandalous past is impacting the company’s future by increasing cost & decreasing revenue.
The bank has not only been witnessing losses after losses, it has also been involved in several scandals.
It has been accused of supporting the mafia, holding money of drug dealers and torturers, being involved in a Mozambique loan scandal, and what not.
On top of that, it saw its lowest trading revenue in a whole century, last quarter
Plus, it was involved in two major scams: the Archegos Capital scam and the Greensill Capital scam.
The story of the Archegos scam is super interesting . What’s interesting is that Credit Suisse had no idea that it had invested money on the hedge fund’s behalf until the whole house of cards came crashing down.
Credit Suisse lost $5.5 billion and investor’s trust in one go.
And then came Greensill Capital, an Australian financial services company that looked super promising. Its business model: Take sales invoices from companies that have completed sales but haven’t received money. Get investors to finance these invoices.
Sounds safe, right? And it was initially. But Greensill decided why wait around for invoices to come? It began predicting companies’ sales based on past orders and started giving them loans on the basis of these predictions.
But we all know predictions don’t always work out. A lot of companies failed to pay back the loans and Greensill filed for bankruptcy.
And all the investors who had invested in the company, including Credit Suisse, were left high and dry.
Now, even though Credit Suisse managed to recover most of the money, it still has to recover about $2.7 billion , which could take over 5 years.
But after these two major scams and losses, Credit Suisse was done. So, it shut down its Prime Finance business (this business basically catered to hedge funds like Archegos, providing them services like trading, lending and so on).
However, this has led to another crisis now.
You see, the Prime Finance business is a big earner. The majority of Credit Suisse’s business right now is wealth management and investment banking.
When it comes to wealth management the bank is doing okay.
But the investment banking arm is not doing that great. This could be due to the current global economic environment because of which not a lot of companies are looking for debt or raise funding (because investors are not willing to give them any), or going public. This is mainly what Credit Suisse’s investment banking arm facilitates. So, business is down and losses are mounting. Other investment banking companies like JP Morgan and Goldman Sachs have also seen revenue decline, but because of its scandals Credit Suisse has been impacted more.
All of these tragedies and pains have also caused a lot of employees including top management to leave or quit, adding to the bank’s woes.
No wonder the bank’s share prices are down in the dumps.
But too much of this sad sob story, what’s the bank doing to solve all this?
💡Credit Suisse’s Solution
Well, Credit Suisse is trying to look at the bright side: its wealth management arm.
Since that part of the business is doing well, it wants to double down on that.
So, the bank is planning on going through a restructuring of its investment arm (that is the one that accounted for most losses in the last two quarters).
It is planning on restructuring its investment business into three parts: its advisory business, a bad bank (which will hold its high-risk assets), and the rest of the business.
This restructuring will take a lot of money, which the bank is planning to raise.
But this leads to two problems:
- The bank has been downgraded by a lot of credit analysts, which has raised borrowing costs for the bank.
- Like we said, the bank’s share price is down. So, raising money by selling stake would be bad for current investors.
So, the bank is planning to sell some of its assets.
This could also be a problem in the long run as it decreases the bank’s earning potential and future prospects.
What’s more, dividing assets and retaining employees through this whole mess is going to be difficult.
So, the future of the bank seems dicey right now.
But other banks like Deutsche Bank have survived such restructuring plans and managed to make it out.
Will Credit Suisse be able to do so? All of us will have to wait & watch.
One thing is for sure that after the debacle of Lehman Brothers, Governments have realized that letting a big bank fail is a bad idea, so CS has some hope here. Although restructured organizations, fail to attract premium customers & talent.
The real spread sheet will emerge in a while from now !!!
December 5, 2022
June 21, 2022