Switzerland’s second-largest lender, Credit Suisse (CSGN) plunged as much as 29% after its largest shareholder, Saudi National Bank, said it could offer no further financial assistance.

It comes a day after Credit Suisse published its delayed annual report, announcing material weaknesses in its financial controls and an end to board bonuses following a difficult 2022.

The sell-off adds to the past week’s declines driven by the collapse of Silicon Valley Bank and has pushed the stock to an all-time low of CHF1.56.

Morningstar banking analyst Johann Scholtz has put his fair value estimate under review as "Credit Suisse’s increased funding costs threaten its going concern status."

"We now believe that the best-case scenario is that Credit Suisse successfully executes another rights issue to shore up the confidence of wholesale funders and clients," Scholtz said on Wednesday, noting that credit default swaps now price in the possibility of a default.

"While a default is still not our base case, we cannot rule out this possibility."

The possible default of one of the region’s largest lenders has sent renewed shockwaves through a sector that only halted a string of SVB-driven losses a day earlier.

Credit Suisse's woes pre-date the collapse of SVB. The bank has lost money for five straight quarters and says it's expecting to post a loss before tax this year. It's undergoing a big transformation after losing billions lending to the Archegos family office and having to freeze $10 billion worth of funds tied to Greensil Capital. Clients pulled out about $100 billion from Credit Suisse in the fourth quarter.

"Credit Suisse’s funding costs have become so prohibitive that we expect the 2023 loss to increase to such an extent that its capital adequacy could be under threat," Scholtz explains.

Its liquidity position seems adequate to handle deposit outflows, and it retains the fall-back of borrowing against its bond holdings from the Swiss National Bank, he added, though such a step wouldn't address Credit Suisse's profitability challenge or address capital concerns. 

An uncertain way out

The bank’s best bet to stem outflows and ease the concern of providers of wholesale funding is yet another rights issue, Scholtz says.

As recently as December, it raised CHF2.2 billion in a rights issue to fund a restructuring and shore up its finances. At the time CEO Ulrich Koerner said the raised capital would let Credit Suisse "further support our strategic priorities from a position of capital strength and create a simpler, more stable and more focused bank built around client needs."

Three months on, doubts about its capital strength are stronger than ever.

There are two problems with a possible rights issue, according to Scholtz: First, shareholders would face significant further dilution after losing 75% in their positions’ value in the past twelve months. More importantly, without the Saudi National Bank, it’s unclear whether such a rights issue would even succeed. Buying CHF1.75 billion through a private placement in December, the Saudis played a key role in the success of that funding round.

Instead, the bank could be broken up: Credit Suisse’s Swiss banking operations, asset management and wealth management could be sold off or listed separately, Scholtz explains, while the doomed markets or trading business would be run off. This could lead to a total wipe-out for shareholders, assuming holding company bonds would need to be bailed in.

The outlook is sinister for holders of Credit Suisse equity, who may have breathed a sigh of relief less than a day ago, when shares rose modestly, breaking a string of declines set off by the collapse of Silicon Valley Bank. That story seems rather distant now.