How the Swiss banking industry became a national embarrassment

There has been little let-up in Credit Suisse’s spectacular fall from grace, reports Simon Foy

Once considered the pride of Swiss banking, Credit Suisse’s fall from grace shows few signs of abating. The beleaguered lender has this week been fighting fires on three fronts.

Firstly, Credit Suisse and other Swiss lenders are being “closely” monitored by the Swiss financial regulator for any signs of contagion from the collapse of Silicon Valley Bank (SVB).

Secondly, the lender was yesterday forced to admit it had “material weaknesses” in its reporting and controls procedures.

Finally, Credit Suisse revealed that a prolonged wave of customer withdrawals has yet to reverse.

Zurich-listed shares in the bank have slumped by more than a tenth this week, amid the wider market turmoil triggered by the demise of SVB.

Yet the crisis of confidence predates this week’s upheaval: the share price is down by a fifth since the start of the year and by 68pc over the last 12 months.

It is a spectacular fall from grace for the 167-year-old national champion, which can trace its origins back to the foundation of modern Switzerland. Credit Suisse grew out of efforts to finance the expansion of national railways in the 1850s and was founded by Swiss politician and businessman Alfred Escher, a man so influential he was nicknamed King Alfred I at the time.

Now, as the bank fights for its life, it has turned to someone with a very different nickname: Uli the Knife.

Ulrich Körner, who was drafted in last summer to turn things around, earned his moniker thanks to a reputation for cost cutting.

In October, Körner unveiled a three-year turnaround plan that included axing 9,000 jobs and spinning off Credit Suisse’s investment bank. Instead, the bank will shift its focus towards managing the wealth of its rich clients. The restructure is an effort to cut the bank loose from a division that has spiralled out of control in recent years and cost the company billions.

Yesterday, Körner pleaded for patience from investors with his turnaround plan.

“Nobody is pleased by the share price development, but we manage what we can manage, and this is the execution of our plan,” Körner told Bloomberg TV.

In a sign of his own growing impatience, he added: “We said it’s a three-year transformation, and you can’t come after two months [and say], ‘Why is everything not done?’”

Investors have good reason to be nervy after Credit Suisse’s recent history. The long list of problems in recent years includes: a corporate spying scandal that claimed the scalp of its chief executive; a $5.5bn loss on its dealings with collapsed hedge fund Archegos Capital; potentially billions of losses from the collapse of Greensill Capital; a “tuna bonds” scandal in Mozambique that has cost it hundreds of millions; the swift departure of its gaffe-prone chairman Sir António Horta-osório; a money-laundering conviction; surging withdrawals; and, in February, its biggest annual loss since 2008.

Körner was speaking on the day that Credit Suisse’s delayed annual report was published, which itself turned up another problem. The bank admitted that “management did not design and maintain an effective risk assessment process to identify and analyse the risk of material misstatements in its financial statements”.

Collectively, the catalogue of errors paints a picture of an organisation in crisis. Beyond problems of its own making, Körner is also having to contend with growing concerns about the health of Europe’s banking system.

On Monday, bets that Credit Suisse would default on its loans hit record highs following the collapse of two US lenders. Fearful that Credit Suisse’s weaknesses increased the risk of it defaulting on its borrowings, money poured into credit default swaps – an instrument that essentially insures against the risk of failure to pay.

Five-year credit default swaps for Credit Suisse rose as much as 36 basis points on Monday to a record high of 453 basis points, according to pricing source CMAQ. Swiss financial regulator FINMA said it was tracking the situation closely, after the share prices of Credit Suisse and rival UBS fell sharply on Monday. Credit Suisse’s shares continued to drop yesterday, falling a further 2pc, while UBS’S rebounded to trade 3pc higher.

Körner has tried to remain upbeat amid the turmoil. Yesterday, he said he was buoyed by the bank’s faster-thanexpected progress on a wave of job cuts and added that there were signs customer confidence was returning.

Customers have begun putting cash back into the bank after months of outflows, he said, after the collapse of SVB and concerns about the health of other US lenders.

“We got inflows yesterday, which is a positive sign, I would say,” he said.

While Körner is hoping this will be the start of a trend, a single day of inflows will not erase the wave of withdrawals the bank suffered last year. In the final three months of 2022 alone, clients pulled $120bn.

In its annual report, Credit Suisse revealed that customer outflows had stabilised to much lower levels but still continued. To add further insult to injury, the bank was forced to delay the publication of its annual report after an 11th-hour query by US regulators on its previous filings.

The reason for the delay was revealed yesterday when the bank said it had identified “material weaknesses” in its reporting and controls procedures for the last two years. Körner said he was addressing the issues “very forcefully”, adding that there was no impact on the company’s financial results for 2022 or previous years.

However, the fact that skeletons continue to be pulled from the bank’s closet has observers worried.

Körner has an unenviable job on his hands. He says all he needs is time: “We are absolutely doing the right thing, it takes some time to get through.

“We want to get back all that we lost. And once we are there, we go beyond and grow the business again.”

Unfortunately for Körner, investors are increasingly losing patience.

‘Nobody is pleased by the share price development but we manage what we can manage’

‘We want to get back all that we lost. And once we are there, we go beyond and grow the business again’