Credit Suisse got a $54 bn lifeline, now it needs to win back clients

The $54 billion lifeline won by Credit Suisse Group AG on Thursday gives it a fighting chance to rebuild its business. Some clients aren’t waiting around to find out how that goes.
 

In Asia, several ultra-wealthy clients continued to cut back their exposure amid the tumult this week. In the Middle East, some customers asked the bank to convert cash deposits into treasury bills and bonds. And in Germany, a wealth manager received inquiries from Credit Suisse clients looking to shift deposits to his firm.

Such attrition, if widespread, will make the overhaul that Chief Executive Officer Ulrich Koerner and his team are overseeing that much harder. Stemming the months-long exit of clients is critical to righting the battered Swiss bank, which saw net outflows hit 110.5 billion francs ($119 billion) in the fourth quarter.

“We want to get back all what we lost,” Koerner said at an investor conference on Tuesday. “And once we are there, we go beyond and grow the business again.” 

The bank has consistently said it has sufficient liquidity, a position the backstop only strengthens. It isn’t yet clear what the overall flows are or whether the backstop is helping attract clients back.

Banker Calls
 

Bankers are calling round clients to reassure them, primed with talking points sent out by executives or communicated at town halls. The lender is offering deposit rates that are significantly higher than rivals to win back funds, Bloomberg reported earlier this month.

“In our conversations with clients over recent weeks, we have been experiencing strong support for the bank and our employees,” the bank said in a statement. “We are fully focused on providing our clients with advice and solutions.”

But some ultra-wealthy families booking out of Asia accelerated their retreat from the Swiss bank this week, according to three large single family offices that collectively manage billions and multiple private bankers based across Hong Kong and Singapore.  

One family office in the region is planning to cut back as much as 30% of its money parked with the embattled bank after the wealth manager was unable to assure it that non-Swiss clients would be protected in the event of a collapse, one of the people said.

Those describing the various clients movements also include bank staff and external advisers, all of whom asked for anonymity to protect business relationships.

Some clients in the Middle East asked the bank to convert their cash deposits into fixed income securities, giving them more comfort to keep money with the firm, according to another person familiar with the matter. Wealth managers in Europe also described outflows on Thursday.

Others seem less concerned, with one adviser to several trusts saying he’s recommended they keep their deposits at the bank even though they far exceed the amounts covered by the country’s deposit insurance. He said he’s convinced there’s no risk because the Swiss government will never let Credit Suisse fail.

Painful Months
 

The client pullbacks risk furthering a trend that stretches back several months. In November, the bank announced about 84 billion Swiss francs had drained from units including the core wealth management business in the first few weeks of the quarter after a social media firestorm about the bank’s financial health spooked clients. The concern is that further outflows could permanently hinder a wealth unit that already slipped to a pretax loss last year.

Outflows haven’t reversed as of this month, though they have stabilized at much lower levels, according to the bank’s annual report released Tuesday, the same day Koerner said on Bloomberg Television that the bank had seen inflows on Monday. A day later, his bank’s shares plunged after its biggest shareholder ruled out adding to its stake, unnerving investors already on edge after three regional US banks failed in a span of days. 

The support of Credit Suisse’s counterparties will also be critical. The biggest banks in the US have been whittling down their direct exposure to Credit Suisse for months as it stumbled from one crisis to the next. Firms including JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. have told regulators their exposures are now minimal, people familiar with the matter have said.

This week, Paris-based BNP Paribas SA also moved to trim its exposure telling clients that it will no longer accept so-called novations where BNP is asked to step in on derivatives contracts where Credit Suisse is a counterparty, people familiar with the matter have said.

Bond Prices
 

Such developments are partly why Thursday’s announcement, while tempering concerns about the lender’s liquidity position, haven’t removed questions about how Credit Suisse can successfully reshape its business. After an initial rally of 40%, shares have since pared some of those gains while the cost to insure the bank’s debt against default rising as its bonds fell deeper into distress. 

The backstop “should serve to stabilize the immediate challenge facing Credit Suisse,” said Jerry del Missier, chief investment officer at Copper Street Capital and former chief operating officer at Barclays Plc. But it “does not make their structural problems disappear.”

That means some analysts have started to sketch out dramatic alternatives to the company’s restructuring.

JPMorgan. analyst Kian Abouhossein wrote in a note that the “status quo is no longer an option,” laying out three possible scenarios for Credit Suisse and saying that a takeover — with rival UBS Group AG a probable suitor — is the most likely. Both lenders are opposed to a forced combination, Bloomberg reported Thursday.

Any such move could be followed by a listing or spinoff of the Swiss unit. Other possibilities mooted in the note included the Swiss National Bank stepping in with a full deposit guarantee or Credit Suisse’s entire investment bank being shuttered.

Executives insist such drastic solutions — and condensed timeframes — aren’t needed now the backstop is in place. The strategic revamp announced in October remains the core plan to turn around the bank, they say, with the bank’s offer to buy back debt underlining its core strength.

“These measures demonstrate decisive action to strengthen Credit Suisse as we continue our strategic transformation,” Koerner said in a statement Thursday. “My team and I are resolved to move forward rapidly to deliver a simpler and more focused bank built around client needs.”

What Bloomberg Intelligence Says
 

Credit Suisse’s steadying of flows is a pivotal factor in stemming investor fears, so the announced liquidity measures supporting its balance sheet should cut tail-risk angst, though central bank aid could reinforce investor concerns over the bank’s operating outlook.

— BI analyst Alison Williams

It adds up to a finely balanced situation. With camera crews gathering Thursday outside of Credit Suisse’s stone-clad headquarters on Zurich’s moneyed Paradeplatz, CEO Koerner urged staff to stay focused.

“Effective communication is key to ensure that our clients and external stakeholders understand the strengths of the bank, our strategy and the accelerated progress we are making to create the new Credit Suisse,” he said in a memo.