Credit Suisse Crisis Shines Spotlight on Bank’s Crown Jewel

When hard times fall on a once-proud house of finance, it’s time to start looking at the family silver.

(Bloomberg) —

When hard times fall on a once-proud house of finance, it’s time to start looking at the family silver.

As government officials, regulators and executives huddle to find ways to stabilize Credit Suisse Group AG, attention keeps turning to the lender’s most prized asset: the Swiss universal bank. 

The domestic bank has in recent years been a profitable anchor while the rest of Credit Suisse has lurched from crisis to crisis. The unit is worth at least 10 billion Swiss francs ($10.8 billion,) say analysts at JPMorgan Chase & Co., currently more than the group’s overall market value. It was the only one of Credit Suisse’s four main divisions to make money last year.

Read More: Switzerland in Talks on Options to Stabilize Credit Suisse 

But now, a standalone future may beckon for the Swiss bank, either in the scenario where the group gets swallowed by a competitor like UBS Group AG or in the event that winding parts of it down becomes unavoidable. In the former, the sheer size of the combined banks in the small Swiss market could be intolerable for regulators. In the latter, officials are obliged to protect domestic assets and depositors while they assess the rest of the bank.  

“The Swiss universal bank is a key partner for the Swiss economy,” said Vincent Kaufmann, chief executive officer of Ethos Foundation, which is also a Credit Suisse shareholder. A spinoff would “restore confidence for sure,” he said. “The more they wait, the less value it will have.”

As Credit Suisse’s share price entered free-fall this week, the separation of the Swiss unit became one option discussed in the talks between executives and government officials, Bloomberg reported earlier. And even if there’s little appetite within UBS or Credit Suisse for a forced merger or a bailout, the value of the Swiss bank is seen as an asset that could be called on to bolster the group. 

UBS executives are exploring an acquisition of all or parts of Credit Suisse at the urging of regulators, according to people familiar with the matter. The Financial Times reported Friday that the boards of the two banks are expected to meet separately over the weekend to discuss the possibility. 

Read More: UBS Is Said to Mull Credit Suisse Deal in Crisis Combination 

The local unit is in many ways a miniature version of the group itself, with retail, private banking, corporate and investment bank functions. And the idea of spinning it off has some pedigree. 

In 2017, Credit Suisse under then-chief executive officer Tidjane Thiam abandoned a long-standing plan for an IPO of parts of the Swiss business in favor of a broad capital raise. The original intent then had been to realize the value of the domestic unit to help fund restructuring across the group, but shareholders rebelled against selling off such a major profit generator. 

The Swiss unit generated more than a quarter of Credit Suisse’s revenue in 2022 and stayed profitable even as the wealth-management and investment-bank units saw losses. It has also remained relatively insulated from the torrent of executive departures at the group level. 

During the unprecedented outflows of client assets that began during the fourth quarter, wealthy clients of the Swiss bank proved more patient. Only 8.3 billion Swiss francs in assets were withdrawn, or approximately 1.5% of the unit’s overall pile, versus around 17% of the global wealth unit’s assets under management that left the bank.

Credit Suisse as been the leader in Swiss domestic investment banking activity in terms of deal value for at least a decade. That points to the role of the bank’s historical predecessor, Schweizerische Kreditanstalt, founded by industrialist and railway pioneer Alfred Escher in 1856 to finance the nation’s industrial expansion. 

Last year, the Swiss unit led major deals in M&A as well as debt and equity-capital markets, helping raise funds for the likes of food multinational Nestle SA and pharma-giant Roche Holdings AG. 

Public Confidence

The Swiss bank is clearly priority number one for the country’s regulators and, as far as can be discerned, the public. Too-big-to-fail rules enacted since the financial crisis of 2008 — when the government bailed out rival UBS — oblige the government to take a “Switzerland First” standpoint. In the case of a looming bankruptcy, those parts of the group relevant to Swiss financial stability would be recapitalized, while others would be liquidated. 

In the Swiss capital Bern this week, members of the public appeared to show confidence in the authorities, including the Swiss National Bank, to preserve the local lender. Similar to arrangements in the European Union, up to 100,000 Swiss francs in accounts are guaranteed by the state. 

“Credit Suisse will not collapse, because the SNB is backing it,” said Alexander Schweingruber, 22, passing the parliament in Bern. “And even if it happened, the Swiss business would survive, which is what’s important for me.”

On Wednesday the SNB said it would offer liquidity support to Credit Suisse amid a record slump in its stock price, in a credit line later revealed to total some 50 billion francs. Regulator Finma underlined that the firm is still above the stringent capital levels it requires of the largest banks. 

But the local unit isn’t completely isolated from the outflows of client assets seen at the broader group, which totaled more than 110 billion francs in the fourth quarter and have been continuing.

“The Swiss franchise is clearly being impacted by what’s going on at Credit Suisse,” said Kian Abouhossein, an analyst at JPMorgan. “It’s not a pure retail business, so not a clear comparable to a pure retail bank like in Spain or Italy for instance. So these deposits include those wealth-management clients and this is an important distinction to make. As they’re generally quicker at moving their money than retail clients.” 

CEO Source

Andre Helfenstein, the genial chief executive of the Swiss business, has been active in the past few days speaking to local media in a bid to shore up confidence amid the lender’s share-price gyrations and appeal to the country’s central bank. The top job at the domestic bank has also been, in the past, the source of a future CEO in times of trouble. 

In the wake of the spying scandal around Tidjane Thiam, then-Swiss chief Thomas Gottstein became a safe-pair-of-hands leader until he, too, was engulfed in the bank’s turmoil and replaced by Ulrich Koerner last year. 

The intervention by the SNB emphasizes the importance of the local bank, according to Arturo Bris, professor of Finance at IMD business school of Lausanne University. Regulators could not risk depositor flight at such a central institution. 

The local business “is the crown jewel for Credit Suisse and that absolutely needs to remain,” he said. “The retail bank in Switzerland has remained healthy. This week retail depositors were asking themselves whether to take their money out of Credit Suisse. That has never happened before.”

–With assistance from Bastian Benrath.

(Updates with UBS considerations.)

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