Credit Suisse to remain ‘underneath strain’ but analysts wary of Lehman comparison

A Swiss flag flies over an indication of Credit Suisse in Bern, Switzerland


Credit Suisse shares briefly sank to an all-time low this week whereas credit score default swaps hit a report excessive, because the market’s skittishness concerning the Swiss financial institution’s future turned abundantly clear.

The shares continued to get well Tuesday from the earlier session’s low of 3.60 Swiss francs ($3.64), but have been nonetheless down greater than 53% on the 12 months.

The embattled lender is embarking on a large strategic evaluate underneath a brand new CEO after a string of scandals and threat administration failures, and can give a progress replace alongside its quarterly earnings on Oct. 27.

Credit Suisse credit score default swaps — derivatives that function a sort of insurance coverage contract towards an organization defaulting on its debt — soared to a selection of greater than 300 foundation factors Monday, properly above that of the remaining of the sector.

Credit Suisse CEO Ulrich Koerner final week sought to reassure employees of the Swiss financial institution’s “strong capital base and liquidity position” amid market considerations and an increase in credit score default swaps.

In an inside memo despatched to employees final week, Koerner promised them common updates throughout this “challenging period” and stated Credit Suisse was “well on track” with its strategic evaluate.

“I know it’s not easy to remain focused amid the many stories you read in the media — in particular, given the many factually inaccurate statements being made. That said, I trust that you are not confusing our day-to-day stock price performance with the strong capital base and liquidity position of the bank,” Koerner stated.

Based on Credit Suisse’s weaker return on fairness profile in contrast with its European funding banking friends, U.S. funding analysis firm CFRA on Monday lowered its value goal for the inventory to 3.50 Swiss francs per share, down from 4.50 francs.

This displays a price-to-book ratio of 0.2 occasions versus a European funding financial institution common of 0.44 occasions, CFRA fairness analyst Firdaus Ibrahim stated in a word Monday. CFRA additionally lowered its earnings per share forecasts to -0.30 francs from -0.20 francs for 2022, and to 0.60 francs from 0.65 francs for 2023.

A price-to-book ratio measures the market worth of an organization’s inventory towards its e-book worth of fairness, whereas earnings per share divides an organization’s revenue by the excellent shares of its frequent inventory.

“The many options rumored to be considered by CS, including exit of U.S. investment banking, creation of a ‘bad bank’ to hold risky assets, and capital raise, indicate a huge overhaul is needed to turn around the bank, in our view,” Ibrahim stated.

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

Despite the overall market negativity towards its inventory, Credit Suisse is simply the eighth-most shorted European financial institution, with 2.42% of its floated shares used to guess towards it as of Monday, in accordance to knowledge analytics agency S3 Partners.

‘Still loads of worth’ in Credit Suisse

All three main credit score rankings businesses — Moody’s, S&P and Fitch — now have a unfavorable outlook on Credit Suisse, and Johann Scholtz, fairness analyst at DBRS Morningstar, instructed CNBC Tuesday that this was doubtless driving the widening of CDS spreads.

He famous that Credit Suisse is a “very well capitalized bank” and that capitalization is “at worst in line with peers,” but the important thing hazard can be a state of affairs akin to that skilled by well-capitalized banks through the 2008 monetary disaster, the place prospects have been reluctant to take care of monetary establishments for concern of a domino impact and counterparty threat.

No solvency concerns for Credit Suisse, says analyst

“Banks being highly leveraged entities are exposed much more to sentiment of clients and most importantly to providers of funding, and that’s the challenge for Credit Suisse to thread that delicate path between addressing the interests of providers of, especially, wholesale funding, and then also the interests of equity investors,” Scholtz stated.

“I think a lot of investors will make the point about why does the bank need to raise capital if solvency is not a concern? But it’s really to address the negative sentiment and very much the issue … in terms of the perception of counterparties.”

Scholtz dismissed the concept that a “Lehman moment” might be on the horizon for Credit Suisse, pointing to the truth that markets knew that there have been “serious issues” with the Lehman Brothers steadiness sheet within the run-up to the 2008 disaster, and that “serious write-downs” have been wanted.

“Whilst there is a potential for new write-downs being announced by Credit Suisse at the end of the month when they’re coming up with results, there is nothing publicly available at the moment that indicates that those write-downs will be sufficient to actually cause solvency issues for Credit Suisse,” Scholtz stated.

“The other thing that is much different compared to the great financial crisis – and that’s not just the case only for Credit Suisse – is that not only are their equity capital levels much higher, you’ve also seen a complete overhaul of the structure of banking capitalization, something like buy-inable debt that’s come along, also improves the outlook for the solvency of banks.”

Citi says in a new note that concerns over Credit Suisse 'is not 2008'

The financial institution’s share value is down greater than 73% over the previous 5 years, and such a dramatic plunge has naturally led to market hypothesis about consolidation, whereas some of the market chatter forward of the Oct. 27 announcement has centered on a attainable hiving off of the troublesome funding banking enterprise and capital markets operation.

However, he contended that there’s “still a lot of value” in Credit Suisse in phrases of the sum of its elements.

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

Scholtz dismissed the notion of consolidation of Credit Suisse with home rival UBS on the idea that the Swiss regulator can be unlikely to greenlight it, and likewise urged {that a} sale of the funding financial institution can be troublesome to pull off.

“The challenge is that in the current environment, you don’t really want to be a seller if you’re Credit Suisse. The market knows you are under pressure, so to try and sell an investment banking business in the current circumstance is going to be very challenging,” he stated.

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

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