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TUMBLING DOWN THE ALPS: THE COLLAPSE OF CREDIT SUISSE 24 MARCH 2023 Rati Kalandarishvili Senior Analyst, Capital Market Research, Brokerage Aleksandre Gotsadze Junior Analyst, Capital Market Research Nikoloz Chitadze Junior Analyst, Capital Market Research Tatia Dzaptashvili Analyst, Capital Market Research, Brokerage Nika Zakareishvili Junior Analyst, Capital Market Research Contents BACKSTORY (3) IN-DEPTH REVIEW (4) IMPLICATIONS (6) Backstory Credit Suisse, a venerable 167-year-old Swiss lender, found itself embroiled in a predicament that stems from a series of scandals over several years, frequent changes in top management, billions of dollars in losses, and a lackluster strategy.
Despite the bank's strenuous efforts to pivot toward its wealth manage- ment business while spinning off its investment banking division and simultaneously raising capital via equity offerings, the initiative failed to placate the investment community, leading to a dramatic sell-off in the bank's shares.

The pinpoint of the negative stance towards CS turned out to be the release of a report from the Saudi National Bank, which ultimately exacerbated the situation even more.
All of this coincided with the frenzy pertaining with the collapse of Silicon Valley Bank and Signature bank, which added more downward pressure to the CS’s shares and raised the need for immediate action to battle liquidity crunch and potential failure of the second-largest lender of Switzerland.
CS Share Price Deterioration 25 20 15 10 5 0 3.22.2018 3.22.2019 3.22.2020 3.22.2021 3.22.2022 Source: Bloomberg UBS CS TUMBLING DOWN THE ALPS: THE COLLAPSE OF CREDIT SUISSE | 24 MARCH 2023 03 IN-DEPTH REVIEW The crisis for Credit Suisse gained momentum in 2021 following the losses associated with the downfall of investment fund Archegos amounting up to $5.5 billion and the implosion of Greensill, resulting in the closure and liquidation of funds worth $10 billion.
Following these hard times, in an attempt to revive the ailing bank, Antonio Horta-Osorio was hired as chairman, but he resigned in January 2022 for violating COVID-19 protocols, just eight months into his tenure.

Ulrich Koerner was then appointed as the new CEO in July, who unveiled a strategic review that failed to impress investors.

These events led to speculation about the bank's possible collapse in the autumn, causing customers to withdraw their investments.
In the fourth quarter, clients withdrew 110 billion Swiss francs ($119 billion), resulting in the bank's largest annual loss of 7.29 billion Swiss francs since the ﬁnancial crisis.

With the intention to counter such downfall and pump up the liquidity, in December, Credit Suisse raised 4 billion Swiss francs from investors.
Customer Deposits at CS, $ Bn 500 450 400 350 300 250 200 2020 FQ1 2020 FQ2 2020 FQ3 2020 FQ4 2021 FQ1 2021 FQ2 2021 FQ3 2021 FQ4 2022 FQ1 2022 FQ2 2022 FQ3 2022 FQ4 Source: Capital IQ As time went on, with being few months into the reshaping process, the primary supporter of the bank, Saudi National Bank informed the press that it could not offer additional funding to Credit Suisse due to regulatory obstacles.
This spurred a market frenzy following which CS’s shares and bonds deteriorated astronomically in value.

All of the above was occurring in parallel with the SVB’s and Signature Bank’s collapses and as the contagion spread over the Europe as well, everything culminated with a tumultuous day of trading, during which lenders attempted to protect themselves from their exposure to the CS via resorting to credit default swaps, sending the quotes for one-year CDS substantially higher than for longer durations.
04 TUMBLING DOWN THE ALPS: THE COLLAPSE OF CREDIT SUISSE | 24 MARCH 2023 Credit Suisse CDS 900 800 700 600 500 400 300 200 100 0 6M 1Y 2Y 3Y 4Y 5Y 7Y 10Y CS CDS Curve Last Mid Spread CS CDS Curve Mid Spread 1 Week Ago Source: Bloomberg Due to possibly disastrous economic ramiﬁcations if Credit Suisse were to fail, Swiss central bank proposed lending up to 50 billion Swiss francs ($54 billion) and purchasing as much as 3 billion francs of debt.
This allowed Swiss ofﬁcials to buy some time to identify a more viable solution and save CS.

Subse- quently, over the next weekend, the authorities compelled the bank to merge with its local competitor UBS for approximately $3.25 billion, which is less than half of its market worth.
TUMBLING DOWN THE ALPS: THE COLLAPSE OF CREDIT SUISSE | 24 MARCH 2023 05 IMPLICATIONS Apart from shareholders experiencing signiﬁcant capital losses following such developments, the take- over of Credit Suisse Group AG by UBS Group AG has caused concern among trading houses in Switzer- land about the potential negative consequences for their industry.
Switzerland is one of the world's largest commodities hubs, and major Swiss banks have played a crucial role in providing credit to companies for the procurement, storage, and transportation of commodities such as oil, metals, and agricultural prod- ucts.

However, recent ﬁnancial instability and the merger of the country's two largest banks may limit the availability of these essential services.
Moreover, apart from the aforementioned asset classes, it should also be noted that the Swiss lender's holding company had 13 outstanding Contingent Convertible Bonds (CoCos) with a total value of $17.3 billion.

CoCos do not have a ﬁxed maturity date but are callable after around ﬁve years.

Due to the recent global market selloff and higher corporate funding costs, it is more likely that lenders may choose to skip a call as it could be expensive to replace the existing note with a new one.
Following the government-bro- kered deal between UBS and CS, Swiss ﬁnancial regulator FINMA triggered a "complete write-down" of the bank's Additional Tier 1 (AT1) bonds to increase core capital, as banks are required to maintain their capital above a minimum level to support an effective resolution in the event of a collapse.

If a lender's capital ratios fall below a predetermined level, then CoCos can be written down.
Typically, in a standard write-down situation, shareholders would suffer losses before AT1 bonds, as Credit Suisse had previously stated in a presentation to investors.

Nevertheless, in the case of the government-mediated agreement, Credit Suisse shareholders are due to receive 3 billion francs ($3.2 billion).
The AT1 bond write-down caused some disruption in the European credit market, with investors scrutinizing their investments to determine if other countries' regulators could replicate what occurred in Switzerland.
Bloomberg European Banks CoCo Tier 1 Total Return Index Unhedged EUR 185 180 175 170 165 160 155 150 145 140 12.9.2 0 22 12.16.2 0 22 12.23.20 22 12.3 0.20 22 Credit Suisse Panic 1.6.2 0 23 1.13.2 0 23 1.2 0.20 23 1.27.20 23 2.3.20 23 2.10.20 23 2.17.20 23 2.24.20 23 3.3.20 23 3.10.2 023 3.17.2 023 Source: Bloomberg 06 TUMBLING DOWN THE ALPS: THE COLLAPSE OF CREDIT SUISSE | 24 MARCH 2023 Due to possibly disastrous economic ramiﬁcations if Credit Suisse were to fail, Swiss central bank proposed lending up to 50 billion Swiss francs ($54 billion) and purchasing as much as 3 billion francs of debt.
This allowed Swiss ofﬁcials to buy some time to identify a more viable solution and save CS.

Subse- quently, over the next weekend, the authorities compelled the bank to merge with its local competitor UBS for approximately $3.25 billion, which is less than half of its market worth.
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