Credit Suisse will remain ‘under pressure’, but analysts wary of Lehman comparison

A Swiss flag flies over a Credit Suisse sign in Bern, Switzerland

FABRICE COFFRINI | AFP | Getty Images

Credit Suisse shares briefly fell to an all-time low on Monday while credit default swaps hit a record high as market jitters about the Swiss bank’s future became abundantly clear.

Shares continued to rally on Tuesday from the previous session’s low of 3.60 Swiss francs ($3.64), but were still down more than 53% on the year.

The troubled lender is embarking on a massive strategic review under a new CEO following a series of scandals and risk management failures, and will update on its progress alongside its results quarterly on October 27.

Credit Suisse’s credit default swaps — derivatives that serve as a sort of insurance contract against a company defaulting on its debt — soared to a spread of more than 300 basis points on Monday, well above that of the rest of the sector.

Credit Suisse CEO Ulrich Koerner last week sought to reassure staff of the Swiss bank’s “strong capital base and liquidity position” amid market concerns and an increase in swaps on failure.

In an internal memo sent to staff last week, Koerner promised them regular updates during this “challenging time” and said Credit Suisse was “on track” with its strategic review.

“I know it’s not easy to stay focused amidst the many stories you read in the media – especially given the many factually inaccurate statements being made. That said, I hope you don’t confuse not our day-to-day performance with the bank’s strong capital base and liquidity position,” Koerner said.

Based on Credit Suisse’s weaker return on equity profile compared to its European investment banking counterparts, US investment research firm CFRA on Monday lowered its price target for the stock to 3, 50 Swiss francs ($3.54) per share, compared to 4.50 francs.

That reflects a price-to-book ratio of 0.2x versus a European investment bank average of 0.44x, CFRA equity analyst Firdaus Ibrahim said in a note on Monday. The CFRA also lowered its forecast for earnings per share to -0.30 francs against -0.20 francs for 2022, and to 0.60 francs against 0.65 francs for 2023.

A price-to-book ratio measures the market value of a company’s stock relative to its equity book value, while earnings per share divides a company’s earnings by the outstanding shares of its common stock.

“The many options allegedly being considered by CS, including exiting the US investment bank, creating a ‘bad bank’ to hold risky assets and raising capital, indicate that a major overhaul is needed. to straighten out the bank, in our view,” Ibrahim said.

“We believe the negative sentiment surrounding the stock will not subside any time soon and believe its share price will continue to be under pressure. A compelling restructuring plan will help, but we remain skeptical given its poor track record in past restructuring plans.”

Despite general market negativity towards its stock, Credit Suisse is only Europe’s eighth-shortest bank, with 2.42% of its free-float shares used to bet against it on Monday, according to data analytics firm S3. Partners.

“Still a lot of value” at Credit Suisse

The three major credit rating agencies – Moody’s, S&P and Fitch – now have a negative outlook on Credit Suisse, and Johann Scholtz, equity analyst at DBRS Morningstar, told CNBC on Tuesday that this was likely to be behind the downturn. widening of CDS spreads.

He noted that Credit Suisse is a “very well capitalized bank” and that the capitalization is “at worst in line with its peers”, but the main danger would be a situation similar to that experienced by well capitalized banks during the financial crisis. of 2008, where customers were reluctant to deal with financial institutions for fear of a domino effect and counterparty risk.

No solvency problems for Credit Suisse, analyst says

“Banks being highly leveraged entities are much more exposed to client sentiment and, importantly, funding providers, and it is the challenge for Credit Suisse to navigate that delicate path between considering interest providers, especially wholesale funding, and then also the interests of equity investors,” Scholtz said.

“I think a lot of investors will explain why the bank needs to raise capital if solvency is not an issue? But it’s really to address the negative sentiment and especially the issue…in terms of the perception of counterparties.”

Scholtz dismissed the idea that a “Lehman moment” could be on the horizon for Credit Suisse, pointing to the fact that the markets knew there were “serious problems” with Lehman Brothers’ balance sheet at the time. approaching the 2008 crisis, and that “serious write-downs” were necessary.

“While there is potential for further writedowns to be announced by Credit Suisse at the end of the month when it releases its results, nothing is publicly available at this time that indicates these writedowns will be sufficient to actually cause solvency issues for Credit Suisse,” Scholtz said.

“The other thing that’s very different from the Great Financial Crisis – and it’s not just Credit Suisse – is that not only are their capital levels much higher, but you also have witnessed a complete overhaul of the structure of bank capitalization, something like the redeemable debt that comes along, also improves the solvency outlook for banks.”

Citi says in a new note that concerns about Credit Suisse

The bank’s share price has fallen more than 73% in the past five years, and such a dramatic fall has understandably led to speculation of market consolidation, while some of the market chatter before the October 27 announcement focused on a possible separation. the difficult functioning of investment banking and capital markets.

However, he claimed there is “still a lot of value” at Credit Suisse in terms of the sum of its parts.

“Its wealth management business is still a decent business, and if you look at the kind of multiples that its peers – especially the standalone wealth management peers – are trading, then you can make a very strong case for deep value. in the name,” he added.

Scholtz rejected the idea of ​​a consolidation of Credit Suisse with its national rival UBS on the grounds that the Swiss regulator was unlikely to give it the green light, and also suggested that a sale of the investment bank would be difficult to achieve.

“The challenge is that in the current environment, you don’t really want to be a seller if you’re at Credit Suisse. The market knows you’re under pressure, so trying to sell an investment banking business under the current circumstances going to be very difficult,” he said.

“The other thing is that while it may address concerns about risk, it’s very unlikely that they’ll sell this business for anything close to a profit, so you’re not going to raise capital by selling this company.”

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