Credit Suisse Fate Changes After SNB Lifeline

The Swiss central bank has extended a CHF50B lifeline to Switzerland's second-largest bank as it looks to restructure following years of losses. Will the bank's fate change for good? 

The Ripples of the US Banking Rout

Credit Suisse is suffering from a case of bad timing. The bank has been reporting bad news for years, with the share price sliding for around a decade. But a couple of announcements in the middle of the US banking rout have created major fallout for Credit Suisse. Over the last couple of days, the share price hit a record low and had the largest drop in its history. This was followed by a gain of over 30% following the Swiss central bank announcement.

What precipitated the latest events was a scheduled announcement of Credit Suisse's annual report, which disclosed "material weaknesses" in its accounting practices. This was in the immediate aftermath of the collapse of three regional banks in the US, so it provided an unpleasant jolt to the markets. The major collapse incurred following a disclosure by the Saudi National Bank (SNB - not to be confused with the Swiss National Bank, also commonly abbreviated as SNB) that it had reached its regulatory limit in the amount of investments it could make in Credit Suisse as a stakeholder. Until then, the Saudi bank increased its stake and mitigated the share price drops.

One SNB Triggers Crash, The Other Throws Lifeline

Switzerland's central bank offering CHF50B in credit was remarkable because Credit Suisse's market capitalization is less than CHF7B. The Swiss cabinet convened to address the issue, with left and right-wing parties voicing objections to state support for the bank. The Swiss National Bank's line of credit is based on Credit Suisse's assets and doesn't amount to a bailout. Another option that has been discussed in the past was a merger of Credit Suisse and UBS, but both parties rejected the plan.

Credit Suisse says the lifeline is enough to buy time to push forward with restructuring plans, including spinning off its investment banking arm. The bank also offered to buy back bonds to help restore confidence among investors. Meanwhile, the ECB went ahead with its 50bps hike, considering the support of Credit Suisse as sufficient. Others are more sceptical, given Credit Suisse's long track record of bad investments that have hurt the bank's profitability. Markets seem to be responding positively so far, as the Swiss action is combined with major banks in the US banding together to support First Republic, which was seen as the most vulnerable. 

EU50 Index in Corrective Mode

Europe's leading index has been under pressure since last week, but the correction had been expected given the extent of the 3240-4320 rally. European banks have dragged Eurostocks 50 more than 5% down and closer to the 4k handle, in what seems to be the first leg of a corrective structure; flag, pennant or triangle. Typically, after impulses, corrections come in 3-wave formations. This implies that further declines could be seen in the near term, towards 3800.

In the short term, the inside bar printed on Thursday could offer respite to 4235 and perhaps revisit the peak or 4400, so long it breaks past 4175. Losing 4080, on the other side, might see the 4k revisited sooner than later, eventually sliding to 3900 and lower.

Source: SpreadX / EUROSTOCKS 50

Key Takeaways

The Swiss central bank has extended a CHF50B lifeline to Credit Suisse after Saudi National Bank declined to increase its stake in Credit Suisse, causing the share price to hit a record low and the largest drop in its history. Credit Suisse will look into offering to buy back bonds to help restore confidence among investors and spin off its investment banking arm.