© Reuters Will Credit Suisse (CS.US) be the ‘next Lehman Brothers’? What does Wall Street think?
Credit Suisse (NYSE: ) is struggling to survive.
Zhitong Finance APP has learned that recently, there has been news in the financial market that a major investment bank is on the verge of bankruptcy, and Credit Suisse is the organization with the most speculation in the market. Affected by market rumours, Credit Suisse’s credit risk gauge rose to record levels. The cost of insuring Credit Suisse’s debt against default jumped to a record high on Monday, according to ICE Data Services. Credit Suisse’s five-year credit default swap (CDS) index is now trading at about 293 basis points, up from about 55 basis points earlier this year and at an all-time high. In addition, exchanges linked to Credit Suisse show a roughly 23% chance that Credit Suisse will default on its debt within five years.
In recent years, after a series of negative events such as the liquidation of Archegos Capital and the bankruptcy of Greensill Capital, the performance and reputation of the Credit Suisse brand have been greatly affected. The market is worried that it could become the next “Lehman Brothers”. Shares of US Credit Suisse stocks have fallen nearly 58% so far this year.
Investors are also not optimistic about Credit Suisse’s prospects. Credit Suisse saw a surge in net shorts, up 25.4 million shares, or 51%, over the past week, according to data analytics firm S3 Partners. This includes the bank’s Zurich-listed common stock and its US-listed American depositary receipts. That short net accounted for 2.84% of Credit Suisse’s outstanding shares, up from 1.87% last week, according to the data. Those short positions totaled $300 million, up from $200 million last week.
To reassure investors, Credit Suisse executives on Sunday reiterated its strong liquidity and capital position to major clients, counterparties and investors. Credit Suisse Chief Executive Ulrich Körner told employees in a memo that the bank has a capital buffer of nearly $100 billion and expects its top-quality Common Equity Tier 1 (CET1) capital ratio to remain at 100 for the rest of the year. -14%. In the memo, Ulrich Körner likened Credit Suisse to a “rising phoenix” that will continue to grow in the long term.
However, the market doesn’t seem to be buying it. Credit Suisse shares in Switzerland fell as much as 12% to a record low on Monday, but recovered almost all of those losses later in the day to settle down 0.93%. Credit Suisse stocks in the US followed suit on Monday, with the stock falling as much as 5% in early trading to a record low of $3.70. But then it turned higher coming to 2.30% at $4.01. The wild swings suggest Credit Suisse is struggling to manage investor confidence as it rushes to develop a repair plan for its investment banking business.
1. Analysts speak out in favor of Credit Suisse executives
On Monday, several analysts issued a report backing Credit Suisse executives, saying the bank has enough capital and liquidity to withstand the current uncertainty and market volatility. Citigroup analysts led by Andrew Coombs said in a note: “The (Credit Suisse) liquidity position is very healthy. We believe that the current increase in spreads is an inconvenience to funding costs rather than a liquidity issue.”
Separately, Bank of America Securities analyst Luis Garrido said a sharp decline in Credit Suisse’s stocks and bonds could prompt the company to accelerate the announcement of its capital plan. Analysts said: “We believe that if Credit Suisse can announce the capital increase in time, it will help restore market confidence in the bank. “Grade “overweight” on higher holding bonds.
Analysts noted that the bank had announced plans to seek third-party capital for its securitization business, which has $20 billion in risk-weighted assets and $75 billion in leveraged exposure. In July, Credit Suisse said it was aiming to create a capital-light, adviser-led investment banking business with a focus on markets to complement its wealth management and Swiss banking operations.
It is reported that Credit Suisse has drawn up plans to split its investment banking business into three parts, namely the consulting business, which may be divested at some point in the future; risk assets; and the rest of the business. Credit Suisse said last week it would provide investors with an updated strategic review when it reports third-quarter 2022 earnings on October 27.
2. Credit Suisse has options but it’s not easy
Credit Suisse, which is hidden in a swamp, has the potential to become Lehman Brothers in 2008. However, in the eyes of analysts, Credit Suisse’s current position is better compared to Deutsche Bank in 2016 and 2017, or Morgan Stanley in 2011. Both banks went through a similar situation, but both survived.
Deutsche Bank’s 2016 crisis was triggered in part by the US Department of Justice’s demand that the bank pay $14 billion to resolve an investigation into mortgage-backed residential securities. Investors’ concerns about the bank were not quelled until it raised 8 billion euros ($7.85 billion) in fresh capital in 2017, even after it finally struck a deal with the US Department of Justice for about $7 billion.
In 2011, rumors at the time that Morgan Stanley was highly exposed to volatile European debt weighed on its stocks and bonds. Morgan Stanley’s largest shareholder came out in public support of the bank, and the crisis facing Morgan Stanley was raised after the losses investors feared never materialized.
For now, Credit Suisse is hoping to raise money through asset sales rather than through a very weak rights issue like Deutsche Bank. “If one of the options includes financing, it is always difficult for stocks to stabilize when the size of the potential offer and dilution is unknown,” said banking analyst Alison Williams. “Difficult markets have added to the impatience.”
ZKB analyst Christian Schmidiger had previously expected as much as CHF 4 billion to be used for upcoming restructuring, growth plans for wealth management and equity accumulation as the guaranteed products business could be sold and balance sheet risk reduced .
Credit Suisse’s proposed sale of its guaranteed products unit has attracted interest from potential buyers including BNP Paribas SA and Apollo Global Management Inc. But there are also doubts that with rising interest rates putting pressure on these assets, along with today’s bleak investment banking environment, selling these assets can still fetch a good price.
“If they had started restructuring a year or two ago, it would have been easier for them to sell assets because there was more demand for risky assets then,” said Andreas Venditti, analyst at Vontobel Bank. Xin’s luck is even worse, as his focus is shifting towards the struggling investment banking business, including the leveraged lending division.”
Venditti believes that if Credit Suisse management does not take aggressive steps to reduce the size of the investment banking business, there will be a backlash from shareholders. That could leave the bank’s management with no choice but to undertake a costly restructuring. The deterioration in current market conditions suggests that Credit Suisse may find it difficult to issue new shares to raise funds for a planned spin-off and its funding costs could rise sharply.
Selling the asset management unit is another viable option for Credit Suisse, according to analysts. Another option is to release the strategic review ahead of time, without having to endure another three weeks of market turmoil. JPMorgan analyst Kian Abouhossein suggested that the bank may publish its third quarter capital position earlier than expected to support a message to investors over the weekend that the bank’s balance sheet remains robust.
