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

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

FABRICE COFFRINI | AFP | Getty Images

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

The shares continued to get better Tuesday from the previous session’s low of three.60 Swiss francs ($3.64), but were still down greater than 53% on the yr.

The embattled lender is embarking on a large strategic review under a latest CEO after a string of scandals and risk management failures, and can give a progress update alongside its quarterly earnings on Oct. 27.

Credit Suisse credit default swaps — derivatives that function a sort of insurance contract against an organization defaulting on its debt — soared to a diffusion of greater than 300 basis points Monday, well above that of the remaining 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 credit default swaps.

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

“I understand it’s challenging to stay focused amid the numerous stories you read within the media — particularly, given the numerous factually inaccurate statements being made. That said, I trust that you simply should not confusing our day-to-day stock price performance with the strong capital base and liquidity position of the bank,” Koerner said.

Based on Credit Suisse’s weaker return on equity profile compared with its European investment banking peers, U.S. investment research company CFRA on Monday lowered its price goal for the stock to three.50 Swiss francs per share, down from 4.50 francs.

This reflects a price-to-book ratio of 0.2 times versus a European investment bank average of 0.44 times, CFRA equity analyst Firdaus Ibrahim said 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 ratio measures the market value of an organization’s stock against its book value of equity, while earnings per share divides an organization’s profit by the outstanding shares of its common stock.

“The numerous options rumored to be considered by CS, including exit of U.S. investment banking, creation of a ‘bad bank’ to carry dangerous assets, and capital raise, indicate an enormous overhaul is required to show across the bank, in our view,” Ibrahim said.

“We imagine that the negative sentiment surrounding the stock is not going to abate any time soon and imagine its share price will proceed 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 final market negativity toward its stock, Credit Suisse is simply the eighth-most shorted European bank, with 2.42% of its floated shares used to bet against it as of Monday, in keeping with data analytics firm S3 Partners.

‘Still lots of value’ in Credit Suisse

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

He noted that Credit Suisse is a “thoroughly capitalized bank” and that capitalization is “at worst in keeping with peers,” but the important thing danger can be a situation akin to that experienced by well-capitalized banks throughout the 2008 financial crisis, where customers were reluctant to take care of financial institutions for fear of a domino effect and counterparty risk.

No solvency concerns for Credit Suisse, says analyst

“Banks being highly leveraged entities are exposed way more to sentiment of clients and most significantly to providers of funding, and that is the challenge for Credit Suisse to string that delicate path between addressing the interests of providers of, especially, wholesale funding, after which also the interests of equity investors,” Scholtz said.

“I believe lots of investors will make the purpose about why does the bank need to boost capital if solvency is just not a priority? But it surely’s really to deal with the negative sentiment and really much the problem … when it comes to the perception of counterparties.”

Scholtz dismissed the concept that a “Lehman moment” may very well be on the horizon for Credit Suisse, pointing to the indisputable fact that markets knew that there have been “serious issues” with the Lehman Brothers balance sheet within the run-up to the 2008 crisis, and that “serious write-downs” were needed.

“Whilst there’s a possible for brand spanking new write-downs being announced by Credit Suisse at the tip of the month once they’re coming up with results, there’s nothing publicly available in the mean time that indicates that those write-downs will probably be sufficient to really cause solvency issues for Credit Suisse,” Scholtz said.

“The opposite thing that is way different in comparison with the good financial crisis – and that is not only the case just for Credit Suisse – is that not only are their equity capital levels much higher, you’ve got also seen an entire overhaul of the structure of banking capitalization, something like buy-inable debt that is 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 bank’s share price is down greater than 73% over the past five years, and such a dramatic plunge has naturally led to market speculation about consolidation, while among the market chatter ahead of the Oct. 27 announcement has focused on a possible hiving off of the troublesome investment banking business and capital markets operation.

Nevertheless, he contended that there’s “still lots of value” in Credit Suisse when it comes to the sum of its parts.

“Its wealth management business remains to be a good business, and should you take a look at the sort of multiples that its peers – especially stand-alone wealth management peers – trade at, then you definitely could make a really strong case for some deep value within the name,” he added.

Scholtz dismissed the notion of consolidation of Credit Suisse with domestic rival UBS on the premise that the Swiss regulator can be unlikely to greenlight it, and in addition suggested that a sale of the investment bank can be difficult to drag off.

“The challenge is that in the present environment, you do not actually need to be a seller should you’re Credit Suisse. The market knows you might be under pressure, so to try to sell an investment banking business in the present circumstance goes to be very difficult,” he said.

“The opposite thing is that while it would address concerns around risk, it’s not possible that they will sell this business for anything near a profit, so you are not going to boost capital by disposing of this business.”

What's happened to Swiss banks?

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