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

Credit score 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 in regards to the Swiss financial institution’s future turned abundantly clear.

The shares continued to get well Tuesday from the earlier session’s low of three.60 Swiss francs ($3.64), however had 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 score Suisse credit score default swaps — derivatives that function a form of insurance coverage contract towards an organization defaulting on its debt — soared to a selection of greater than 300 foundation factors Monday, effectively above that of the remainder of the sector.

Credit score Suisse CEO Ulrich Koerner final week sought to reassure employees of the Swiss financial institution’s “robust capital base and liquidity place” 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 “difficult interval” and mentioned Credit score Suisse was “effectively on monitor” with its strategic evaluate.

“I do know it isn’t straightforward to stay targeted amid the various tales you learn within the media — particularly, given the various factually inaccurate statements being made. That mentioned, I belief that you’re not complicated our day-to-day inventory worth efficiency with the robust capital base and liquidity place of the financial institution,” Koerner mentioned.

Based mostly on Credit score Suisse’s weaker return on fairness profile in comparison with its European funding banking friends, U.S. funding analysis firm CFRA on Monday lowered its worth goal for the inventory to three.50 Swiss francs ($3.54) per share, down from 4.50 francs.

This displays a price-to-book ratio of 0.2x versus a European funding financial institution common of 0.44x, CFRA Fairness Analyst Firdaus Ibrahim mentioned in a observe 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 ebook worth of fairness, whereas earnings-per-share divides an organization’s revenue by the excellent shares of its frequent inventory.

“The various choices rumored to be thought of by CS, together with exit of U.S. funding banking, creation of a ‘dangerous financial institution’ to carry dangerous belongings, and capital increase, point out an enormous overhaul is required to show across the financial institution, in our view,” Ibrahim mentioned.

“We imagine that the detrimental sentiment surrounding the inventory won’t abate any time quickly and imagine its share worth will proceed to be underneath strain. A convincing restructuring plan will assist, however we stay skeptical, given its poor monitor report of delivering on previous restructuring plans.”

Regardless of the final market negativity towards its inventory, Credit score Suisse is just the eighth-most shorted European financial institution, with 2.42% of its floated shares used to guess towards it as of Monday, in response to information analytics agency S3 Companions.

‘Nonetheless a number of worth’ in Credit score Suisse

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

He famous that Credit score Suisse is a “very effectively capitalized financial institution” and that capitalization is “at worst consistent with friends,” however the important thing hazard could be a state of affairs akin to that skilled by well-capitalized banks through the 2008 monetary disaster, the place clients had been reluctant to take care of monetary establishments for worry of a domino impact and counterparty threat.

“Banks being extremely leveraged entities are uncovered rather more to sentiment of shoppers and most significantly to suppliers of funding, and that is the problem for Credit score Suisse to string that delicate path between addressing the pursuits of suppliers of, particularly, wholesale funding, after which additionally the pursuits of fairness buyers,” Scholtz mentioned.

“I feel a number of buyers will make the purpose about why does the financial institution want to lift capital if solvency is just not a priority? Nevertheless it’s actually to handle the detrimental sentiment and really a lot the problem … by way of the notion of counterparties.”

Scholtz dismissed the concept a “Lehman second” may very well be on the horizon for Credit score Suisse, pointing to the truth that markets knew that there have been “critical points” with the Lehman Brothers steadiness sheet within the runup to the 2008 disaster, and that “critical writedowns” had been wanted.

“While there’s a potential for brand new writedowns being introduced by Credit score Suisse on the finish of the month after they’re arising with outcomes, there’s nothing publicly accessible in the mean time that signifies that these writedowns will likely be ample to really trigger solvency points for Credit score Suisse,” Scholtz mentioned.

“The opposite factor that’s a lot totally different in comparison with the Nice Monetary Disaster – and that is not simply the case just for Credit score Suisse – is that not solely are their fairness capital ranges a lot increased, you have additionally seen an entire overhaul of the construction of banking capitalization, one thing like buy-inable debt that is come alongside, additionally improves the outlook for the solvency of banks.”

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

Nonetheless, he contended that there’s “nonetheless a number of worth” in Credit score Suisse by way of the sum of its components.

“Its wealth administration enterprise remains to be a good enterprise, and should you have a look at the form of multiples that its friends – particularly standalone wealth administration friends – commerce at, then you may make a really robust case for some deep worth within the title,” he added.

Scholtz dismissed the notion of consolidation of Credit score Suisse with home rival UBS on the idea that the Swiss regulator could be unlikely to greenlight it, and in addition instructed {that a} sale of the funding financial institution could be troublesome to drag off.

“The problem is that within the present atmosphere, you do not actually need to be a vendor should you’re Credit score Suisse. The market is aware of you’re underneath strain, so to try to promote an funding banking enterprise within the present circumstance goes to be very difficult,” he mentioned.

“The opposite factor is that whereas it would tackle considerations round threat, it is not possible that they will promote this enterprise for something near a revenue, so you are not going to lift capital by disposing of this enterprise.”