Credit Suisse Stock Lending Clients Retreated Amid Swings

An illuminated Credit Suisse sign above the entrance to a Credit Suisse Group AG office building at night in Muri, Bern, Switzerland.

(Bloomberg) -- A Credit Suisse Group AG business that lends out shares reversed some of those transactions in recent days after investors that provided the securities pulled back over concern about the bank's financial health.

The Zurich-based lender told borrowing clients at the stock-loan unit that some counterparties temporarily stopped dealing with it because of mounting market pressure, forcing it to withdraw shares, according to people with knowledge of the matter. The unit saw less than 5% of the total pool pulled, and there was no funding impact for Credit Suisse, one of the people said.

While the bank is merely a middle-man in the securities lending deals, several investors that provided the shares have been asking what risks they're taking with regard to the bank itself, said the people, asking for anonymity discussing non-public information. Some outflows from the stock-loan business reversed over the past 24 hours and the revenue impact is not material, one of them said.

Still, the pullback of clients underscores the urgency surrounding Chief Executive Officer Ulrich Koerner's plans to repair the bank and regain market confidence after a brutal few years that included billions of dollars in losses on Archegos Capital Management. Credit Suisse shares hit a record low on Monday and the cost to insure its debt against default spiked to an all-time high. Both have since recovered. Koerner is due to update investors on Oct. 27.

“We remain close to our clients as we conduct our strategic review,” said Dominique Gerster, a spokesman for Credit Suisse.

Securities lending is common among investors because it allows them to generate a little extra income from holdings that would otherwise sit idle. Borrowers use the securities to make market bets without having to buy them -- such as hedge funds that want to short a stock -- though they typically have to provide some form of collateral.

Credit Suisse's stock-loan business is part of its global trading solutions division, a joint venture between the investment bank and wealth-management businesses. It's separate from the prime brokerage business, which used the bank's own money to provide services to hedge funds. Credit Suisse exited the prime business in the wake of the Archegos losses.

The stock loan business, by contrast, acts as fiduciary for wealth management clients and Swiss institutions, taking a cut of the money the lenders of securities make in those deals. That limits any financial risk for the bank.

In addition, banks and regulators have taken a number of steps since the financial crisis to try to break the link of a lack of market confidence leading to real financial pain for banks. Authorities now mandate that banks hold enough cash and highly liquid assets to cover a month of outflows in severe stress. Credit Suisse said in July that it had almost double that requirement.

And banks have fewer derivative trades these days that force them to post collateral in the event of a credit downgrade. A decade ago, Credit Suisse said a two-notch cut by all major ratings companies would force it to pony up 3.6 billion francs. Now, the equivalent figure is one-sixth of that.

Still, nervous clients going to rivals with trades or balances weighs on revenue in the short term and can take years of efforts to win back.

(Adds date of restructuring plan in fourth paragraph)

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