Decision-making, trust and the case of Credit Suisse

Credit Suisse has recently gone through a storm. Two elements have been key in this journey: existing negative perceptions and unfortunate communication strategy.

Trust is a feeling towards people, entities, companies or organizations that reflect the belief that these will commit to the agreements on which the relationship is based. Our current society works under these relations of trust. Trust is earned overtime, through right decisions, coherent and predictable behaviors, transparent and honest communications and positive relationships. Nevertheless, trust is a capricious lady who comes and suddenly leaves as a result of unfortunate decisions. An example of it is Credit Suisse, the international bank that recently faced rumors spread massively in social media about the robustness of its balance sheet.

Two elements are at the heart of this storm: negative perceptions and confusing communications. Scandals like Archegos and Greensill, economic losses in its commercial units and trials against the company generated negative perceptions. Doubts about the future strategy of the company and a recent publication of an eventual restructuring of its investment bank unit did not help. This restructuring would lead to a split of the investment bank into three units: a consulting business, a bad bank and all the rest of the business; and a headcount reduction of 10%. The bank had previously communicated that wealth management would be its biggest bet and the main growth engine for the years to come.

The communication strategy to manage this crisis was unfortunate. The company decided not to communicate around the real economic situation highlighting that sharing further details was still premature. This statement was obviously negatively perceived by the market, that considered insufficient the details released by the company. The share price plummeted and investment banks revised downwards the objective share price of Credit Suisse.

Leaving questions unanswered multiplies the doubts of the market and generates speculation about what is going on. The first risk is currently around capital. Is current net book value sufficient to absorb negative impacts? Once the accounting adjustments to the company net book value are booked, the bank might be below the ratios established by the banking regulators. In June's earning release, the bank published a healthy equity tier one ratio of 13,5%. Nevertheless, this did not calm the markets, which are expecting strong adjustments from non-recorded losses. There is a second risk, insufficient liquidity to finance both the restructuring costs (4.000 million Suisse francs) and the investment needed to reinforce the wealth management unit. In case market predictions are right, this could bring the need to sell valuable assets or lower quality assets (those with underlying losses). Funding cash needs through bond underwriting seems unlikely given the high yield (12.5%) requested from the market to buy bonds to Credit Suisse and bear the risk of non-payment. Investors are not willing to lend money to this bank without a higher yield that compensates for the risk they assume.

The market assumed that a capital increase is the only viable solution. In the short term, capital increases bring a reduction in the share price of the company as future benefits will be shared among a bigger number of shares and shareholders.

Financial analysts are also questioning the future sustainability of the business. The entity will have to fund both the restructuring and the development of the wealth management unit. In the latest communications the company did not give any guidance on how both investments could be funded, has denied the possibility of a capital increase and has minimized the liquidity issue. The lack of details and precise financial information has shaken the markets. All this makes very difficult for experts to assess the real situation of the bank. Markets did not value positively this communication strategy that was supposed to reduce fear and contain panic.

From experience, fear is an emotion that spreads fast in all directions. It starts in the financial markets, gets to customers, employees and society in general. It generates doubts, noise and various scenarii, from bad to worse. These are moments where mistrust and panic spread.

Mitigating the propagation of fear and starting to build trust should be the main objectives of crisis management communication. Managing crisis requires strong leadership, leaders that look at the world with courage and value truth above all. To earn trust you need to make the right decisions. Three golden rules are there to help: communicate transparently, think people first (employees, customers, investors), give sense direction … and hope!

David Cabero, General Manager Europe in Group BIC and expert in decision-making?