Swiss Bankers and US Gov’t Square off Over Credit Suisse

Credit Suisse (NYSE:CS) will most likely get a helping hand from the Swiss government in the bank’s ongoing tussle with the U.S. to ensure the secrecy of its clients. The bank was notified in July that it was under criminal investigation for allegedly helping U.S. citizens avoid paying U.S. income tax. And with the threat that legal proceedings could result in forfeiture of all its U.S. assets and in a worst case scenario the loss of its operating license in the U.S., the bank will surely strike some form of a settlement (See Credit Suisse Should Settle Tax Probe to Clear Overhang). But the U.S. government’s demand for information about all U.S. clients holding accounts worth at least $50,000 over the last 10 years from Credit Suisse and other private banks like Julius Baer and Wegelin could raise the stakes too much for the Swiss banking system and could force the Swiss government to intervene so concessions will likely be made on both sides in a proposed settlement. ^[1] Credit Suisse is the second largest bank in Switzerland after UBS (NYSE:UBS), and both compete with the likes of Deutsche Bank (NYSE:DB), JPMorgan (NYSE:JPM), Goldman Sachs (NYSE:GS), Citigroup (NYSE:C) and Morgan Stanley (NYSE:MS).

We maintain a $49 price estimate for Credit Suisse’s stock, which is at a significant premium to its market price.

The Swiss Government Won’t Bend This Time

The Swiss banking system has thrived for decades on the back of the secrecy it provides account holders. While the country’s biggest banks, UBS and Credit Suisse, have a sizable international wealth management operation, many of its high net worth offshore clients maintain accounts in Switzerland to benefit from the privacy that comes with such an account.

The Swiss government buckled under pressure from the U.S. in 2009 when it stepped in to settle a similar issue concerning UBS. UBS ended up paying a $780 million fine and also handed over details of nearly 4,500 secret accounts to the U.S. But in the recent past, the Swiss government has been able to protect its banking laws while addressing concerns of countries like Germany and the U.K. by entering into new tax agreements that effectively curb tax evasion opportunities in Switzerland while maintaining client privacy (See UBS and Credit Suisse Will Take Lumps from Swiss-British Tax Agreement).

The U.S. expects the Swiss banks to provide the information it demands by the end of the week – a stand which is seen as inconsiderate of the Swiss banking laws by the Swiss Bankers Association. ^[1]  With the Swiss government indicating that it “wants a solution based on the existing laws,” Credit Suisse may breathe easy for the time being with its government standing behind it.

See our estimates for Credit Suisse

1. No new treaty for US tax deal-Swiss bankers group, Reuters, Sep 5 2011 [↩] [↩]