The stock prices of Credit Suisse and Deutsche Bank are plummeting. Both international investment banks’ shares are currently trading at 0.23x and 0.3x tangible book value, respectively. Judging by the markets, something is wrong.
Deutsche bank is still carrying on business as usual and addressing long-standing issues. But Credit Suisse seems to be battling an imminent collapse.
The recent market occurrences are like the Lehman Brothers’ financial crisis of 2008. Going by the trends, we could be heading toward another major financial crisis.
Credit Bank CEO says Bank is at a “Critical Moment”
The investment bank, Credit Suisse, is experiencing risk management problems. Among the most notable is the $5.5 billion Archegos Capital disaster. This and other bad moves made by the company have landed them in serious trouble.
In a recent memo, Credit Suisse's CEO, Ulrich Koerner, stated that the bank is at a “critical moment.” It is also preparing for its latest overhaul.
The memo was sent to staff to reassure them, even as the company's shares hover near a record low. Koerner urged employees to maintain discipline and close contact with clients. This is despite all the media attention the bank is getting.
Furthermore, Koerner emphasized the bank's strength. He told employees not to confuse "day-to-day" stock price performance with the Swiss firm's "strong capital base and liquidity position."
But, the claims of a strong capital base and liquidity position rings similar to those of Lehman Brothers during their 2008 financial crisis. Five days before the company finally filed for bankruptcy, Lehman’s CFO, Ian Lowitt, said they did not feel the need to raise extra capital as part of their restructuring plans.
According to Lowitt,
“Our capital position at the moment is strong.”
But the company's unfortunate collapse proved otherwise.
However, it appears to be a common scenario when a company is in trouble. Management will scramble to get things right while reassuring the public that everything is under control. This could go on until the company collapses.
When the company declares bankruptcy, investors claim they would not have bought or could have sold if the company had not claimed to be strong.
Credit Suisse Claims vs. Opinions on the Streets
Credit Suisse seems to be doing everything it can to return to profitability and bring an end to its string of scandals. They will go through a strategic review, which should be ready by October 27.
However, the public is questioning the company's standing. Head of Research for GoldMoney, Alasdair Macleod, tweeted that:
“The collapse in Credit Suisse's share price is of great concern. From $14.90 in Feb 2021 to $3.90 currently, markets are saying it's insolvent and probably bust.”
Citing the statement from CEO Koerner, Wall Street Silver asked,
“How long until other banks reduce trading and exposure to Credit Suisse as a trading counter-party? $CS Their stock price is tanking. The markets are telling us something is wrong. Now the CEO is saying this….”
The tweet adds:
“Sounds like what Lehman used to say before bankruptcy...”
Financial commentator, James Melville, also believes there is an impending major financial crisis.
According to Melville,
“Deutsche Bank and Credit Suisse are tanking more right now than the financial crisis of 2009. There are so many market indicators that we are heading towards a major financial crisis.”
Even though both companies are experiencing a downward trend, the public seems to be paying more attention to Credit Suisse.
ABC business reporter David Taylor added:
“Credible source tells me a major international investment bank is on the brink.”
Comments on his tweet show that the public is well aware of both companies’ financial situations. But they insist Credit Suisse should be the one heading towards collapse.
From all indications, Credit Suisse will have a hard time convincing the public that they have things under control.
Deutsche Bank's Long-standing Scandal and Strife
Deutsche bank has gone through years of decline. This follows the company's association with several scandals and issues.
The company's total assets shrunk by a third, and the share price of the company fell to record lows. Both revenue and dividend fell dramatically.
The company even had to let some staff go. Former bankers involved in many scandals got jail sentences. Others, including former board members, are currently facing criminal investigations.
Deutsche bank faced charges ranging from rigging benchmark interest rates to the mis-selling of securities, money laundering on behalf of Russian clients, tax fraud, and other issues.
It had to raise €19.5bn in fresh equity and accumulated €10bn in total losses. It also went through a five-strategy revamp and paid at least €14bn in fines and settlements.
These issues accelerated the company’s downward trend. It took almost three years to recuperate from it. A senior manager now refers to the experience as "near-death."
However, the company claims to have implemented new strategies to propel it forward. This is despite currently being a shadow of its former self. There are claims that it is earning its cost of capital as well as continuing to take market share.
However, the company's share price is still spiraling down. Although the company is operating and following its review strategies, investors must beware.
Is There Light At The End Of The Tunnel?
Although Credit Suisse is yet to throw in the towel, escaping the impending collapse would almost be a miracle. If the company must survive, it must follow through with its proposed restructuring.
Restructuring an investment bank is a lengthy, risky, and expensive process. Credit Suisse will need to raise significant funds. Also, the management team will need to figure out how to keep key employees in the company. This is vital, especially as US banks aggressively expand into European capital markets.
On the other hand, Deutsche bank still has to rise above all of its previous scandals to attain stability. Its recent downward spin shows that it still has a long way to go toward achieving its stability goals.
However, as investors, it is best to avoid Credit Suisse shares. Waiting until the company concludes its review is the best move. Credit Suisse has to present workable plans on how it intends to turn its ongoing financial crises around.
Stabilizing Credit Suisse will likely take several years, but there is no guarantee of success. Deutsche bank may still pull through, but there's no way to tell if the effects of its long-term scandals are not over.
