Credit Suisse is still in trouble
Credit Suisse’s crisis has a solution.
The Swiss Federal Government announced on March 19, 2023 local time that Credit Suisse was acquired by UBS for approximately 3 billion Swiss francs (as of March 17, the market value of Credit Suisse was approximately 7.4 billion Swiss francs). The Swiss government will provide about 25 billion Swiss francs for protection and support in this acquisition, including: 15.8 billion Swiss francs of Credit Suisse Additional Tier 1 (AT1) bonds will be fully written down, thereby increasing core capital; for non-core assets The Swiss government promised to provide a loss guarantee of 9 billion Swiss francs, but the loss of the first 5 billion Swiss francs will be borne by UBS itself.
In other words, Credit Suisse is about to be acquired by UBS, and the purchase price is equivalent to a 40% discount on the recent market value.
As a global systemically important bank, Credit Suisse had frequent problems in recent years until it was quickly acquired this time. In fact, its crisis has long been on the horizon, but the recent risks in the banking system have amplified its crisis and accelerated its collapse.
Credit Suisse’s financial report has long been reflected, including revenue decline, increased losses, business restructuring, loss of deposits and non-profitability (failure to generate positive cash flow from operating activities).
Serious illness exposed
Credit Suisse’s earliest problems were due to the internal control defects disclosed in the annual report released on March 14, and the stock price fell; and due to the recent frequent occurrence of risk factors in the banking system, there was a certain degree of panic in the market, and the Swiss National Bank also urgently Introduce policies to stabilize market confidence.
In fact, investors who have followed Credit Suisse for a long time will actually notice that there have been some negative reports surrounding the bank in recent years. For example, it is reported that Credit Suisse has some monitoring and monitoring of its internal executives. These behaviors are suspected of breaking the law and are therefore punished by the Swiss financial supervisory authority. There are also some reports that the bank may be related to some corruption, money laundering and so on. In 2020, CEO Tidjan Thiam resigned.
With a series of negative news emerging one after another, it should be very serious for Credit Suisse to face the loss of major customers. On October 27, 2022, Credit Suisse announced a series of strategic restructuring decisions, deciding to make a series of adjustments to its investment banking business, resource allocation, and organizational structure. At the beginning of 2023, Credit Suisse Group will be restructured into five parts-wealth management, Swiss Bank, asset management, investment banking and a new department CRU (capital release unit). This new division is apparently intended for corporate disposition and restructuring.
On March 9, Credit Suisse announced that it had received an inquiry from the US Securities Regulatory Commission on March 8 because it retroactively adjusted the cash flow statements for 2019 and 2020 in its 2021 annual report. concerned and inquired about the matter. Credit Suisse has therefore decided to postpone the disclosure of the 2022 annual report in order to more cautiously respond to inquiries from the US Securities Regulatory Commission.
In the annual report disclosed on March 14, the CEO and CFO of Credit Suisse both admitted that the company’s previous internal control had problems, which means that the internal control of the 2021 annual report is weak, but the company’s current disclosure still believes that the financial Statements are fair representation.
In the audit report of the 2022 annual report, Price Waterhouse Certified Public Accountants issued an unqualified opinion on the financial statements. However, it issued a negative opinion on Credit Suisse’s internal control, arguing that Credit Suisse has major deficiencies in risk identification, risk supervision, and risk control. Mistakes. Puhua pointed out in the audit report that the audit opinion on internal control does not affect the audit opinion on the financial statements issued by it, and believes that there is no problem with the results of the financial statements.
It should be noted that in the 2021 audit report, Puhua still believed that there were no major defects in internal control, but now it has changed its words, which means that the 2021 internal control audit opinion is actually wrong.
Judging from the report data, Credit Suisse’s operating results in 2022 are very poor. Net revenue fell to CHF 14.9 billion from CHF 22.6 billion in 2021. This comes from two reasons: first, the interest expense on the banking side has increased; second, the income from other businesses has dropped sharply, from 13.17 billion Swiss francs to 8.85 billion Swiss francs. From the income statement, although Credit Suisse has also made some efforts in cost control in 2022, the operating expenses are generally lower than in 2021, but due to the poor performance of income, it will lead to a huge loss of 7.3 billion Swiss francs in 2022 .
It can be said that Credit Suisse is facing tremendous pressure in both banking and other businesses, especially the decline in commissions and fees brought by other businesses is too fast.
In the face of the U.S. dollar interest rate hike, Credit Suisse’s performance in traditional banking business is quite satisfactory. After deducting interest expenses from interest income, the overall net interest income fell by 8%. However, there must have been a major disturbance in other businesses, leading to the company’s reorganization, and it may affect the whole body, which will affect the traditional banking business. In fact, the recent evolution is in this direction.
Let’s look at Credit Suisse’s balance sheet data for 2022.
Look at owner’s equity first. At the end of 2022, Credit Suisse has already solved part of the liquidity problem through equity financing, and raised 1.76 billion Swiss francs and 6.25 billion Swiss francs twice through stock financing. Despite the huge loss in 2022 and the equity financing income, the owner’s equity still increased slightly. As the overall scale of the company has shrunk, the proportion of owner’s equity has increased.
Look at debt. Credit Suisse admitted in its annual report that in the fourth quarter of 2022, the company will face big liquidity problems. The churn of customer deposits was severe early in the fourth quarter, and although the rate of churn slowed toward the end of the year, the trend has not yet reversed. Customer deposits fell by CHF 138 billion in the fourth quarter. Correspondingly, the loss of the company’s assets in the fourth quarter of 2022 is very serious, and the amount of assets has dropped by 8% compared with the end of the third quarter, of which two-thirds were lost in October. It can also be seen that the ratio of customer deposits to total assets in the balance sheet has also dropped from 52% to 44%.
Take a final look at assets. Unlike Silicon Valley Bank, most of Silicon Valley Bank’s assets are invested in various securities, especially long-term securities. Credit Suisse accounts for a larger proportion of loans to customers. Although the absolute amount has decreased (from 291.7 billion Swiss francs to 262.4 billion Swiss francs), its proportion has increased due to the overall shrinkage of the company. About half of the company’s total assets. Therefore, for Credit Suisse, the quality of these loans becomes the key to its asset quality.
In the notes on loans, the three relatively large loans are mortgage loans, consumer loans and corporate loans. Information on loan quality is very limited in the footnotes. Observing the income statement of Credit Suisse, we can see that the provision for loan losses in 2022 is very small, only 16 million Swiss francs, and as high as 4.2 billion Swiss francs in 2021. The author is not very clear about the provision for loan losses in 2022 whether the intensity is appropriate.
Finally, let’s look at the net cash flow data from operating activities of Credit Suisse’s 2022 cash flow statement. Since the company disclosed that it retrospectively adjusted the cash flow statements for 2019 and 2020, it believed that there were internal control errors and omissions in the classification and presentation of non-cash items. Therefore, the author also looked up the data before and after the retroactive adjustment in 2020.
It can be found that the poor operating conditions of Credit Suisse have already been reflected in the cash flow statement. Although according to the company’s current statement, the previous cash flow statement was prepared incorrectly, the adjusted net cash flow from operating activities in 2020 is still negative.
Comparing the cash flow items of operating activities before and after the adjustment in 2020, it can be seen that in the process of adjusting from net profit to cash flow of operating activities, the data of many items have been adjusted. The expenses accrued for share payment are non-cash expenses, which were not considered at all before. This mistake is a bit obvious, and it is not clear why Puhua did not find such an obvious mistake before.
To sum up, judging from the signs in the financial report, Credit Suisse should face big problems in investment banking, asset management and other businesses, which may need to be digested and restructured. As for the traditional banking business, it depends on its loan quality. Credit Suisse will not be willing to accrue bad debts in 2022.