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

Credit Suisse interests briefly sank to an all-time low this week while credit default swaps hit a record high, as the market’s skittishness with reference to the Swiss bank’s future became abundantly clear.

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

The embattled lender is embarking on a massive strategic review under a new CEO after a string of scandals and risk stewardship failures, and will give a progress update alongside its quarterly earnings on Oct. 27.

Credit Suisse credit default swaps — derivatives that be obedient to as a kind of insurance contract against a company defaulting on its debt — soared to a spread of more than 300 infrastructure points Monday, well above that of the rest of the sector.

Credit Suisse CEO Ulrich Koerner last week endeavoured to reassure staff of the Swiss bank’s “strong capital base and liquidity position” amid market concerns and a mount in credit default swaps.

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

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

Based on Credit Suisse’s weaker return on judiciousness profile compared with its European investment banking peers, U.S. investment research company CFRA on Monday modulated its price target for the stock to 3.50 Swiss francs per share, down from 4.50 francs.

This reflects a price-to-book correlation of 0.2 times versus a European investment bank average of 0.44 times, CFRA equity analyst Firdaus Ibrahim phrased in a note Monday. CFRA also 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 proportion measures the market value of a company’s stock against its book value of equity, while earnings per share dole outs a company’s profit by the outstanding shares of its common stock.

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

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

Despite the general market negativity toward its lineage, Credit Suisse is only the eighth-most shorted European bank, with 2.42% of its floated shares used to bet against it as of Monday, corresponding to data analytics firm S3 Partners.

‘Still a lot of value’ in Credit Suisse

All three major credit ratings workings — Moody’s, S&P and Fitch — now have a negative outlook on Credit Suisse, and Johann Scholtz, equity analyst at DBRS Morningstar, depicted CNBC Tuesday that this was likely driving the widening of CDS spreads.

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

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

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

Scholtz released the idea that a “Lehman moment” could be on the horizon for Credit Suisse, pointing to the fact that markets knew that there were “grim issues” with the Lehman Brothers balance sheet in the run-up to the 2008 crisis, and that “serious write-downs” were needed.

“Whilst there is a likely 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 readily obtainable at the moment that indicates that those write-downs will be sufficient to actually cause solvency issues for Acclaim Suisse,” Scholtz said.

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

The bank’s share price is down more than 73% over the past five years, and such a theatrical plunge has naturally led to market speculation about consolidation, while some of the market chatter ahead of the Oct. 27 commercial has focused on a possible hiving off of the troublesome investment banking business and capital markets operation.

However, he contended that there is “silent a lot of value” in 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 thoughtful of multiples that its peers – especially stand-alone wealth management peers – trade at, then you can make a very smelly case for some deep value in the name,” he added.

Scholtz dismissed the notion of consolidation of Credit Suisse with domestic competitor UBS on the basis that the Swiss regulator would be unlikely to greenlight it, and also suggested that a sale of the investment bank liking be difficult 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 differentiates you are under pressure, so to try and sell an investment banking business in the current circumstance is going to be very challenging,” he said.

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