© Archyde.com. Will Credit Suisse (CS.US) be the ‘next Lehman Brothers’?What does Wall Street think
The precarious Credit Suisse (CS.US) is struggling to survive.
Zhitong Finance APP has learned that recently, there has been news in the financial market that a large investment bank is on the verge of bankruptcy, and Credit Suisse is the institution with the most speculation in the market. Affected by the market rumors, Credit Suisse’s credit risk gauge rose to record levels. The cost of insuring Credit Suisse’s debt once morest default jumped to a record high on Monday, according to ICE Data Services. The Credit Suisse five-year credit default swap index (CDS) is now trading at around 293 basis points, up from around 55 basis points earlier this year and at an all-time high. In addition, swaps linked to Credit Suisse show a roughly 23% chance of Credit Suisse defaulting on its debt within five years.
In recent years, following a series of negative events such as the liquidation of Archegos Capital and the bankruptcy of Greensill Capital, Credit Suisse’s performance and brand reputation have been greatly affected. The market is worried that it may become the “next Lehman Brothers”. Shares of Credit Suisse U.S. stocks have fallen nearly 58% so far this year.
Investors are also not optimistic regarding 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 solid liquidity and capital position to large 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 highest-quality Common Equity Tier 1 capital ratio (CET1) to remain at 100 for the rest of the year. 13%-14%. In the memo, Ulrich Körner also likened Credit Suisse to a “rising phoenix” that will continue to grow in the long term.
However, the market does not seem to be buying it. Credit Suisse shares in Switzerland tumbled 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’s U.S. stocks followed the same trend on Monday. The stock fell as deep as more than 5% in early trading to an all-time low of $3.70. But it then turned higher and ended up 2.30% at $4.01. The wild swings suggest that 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 support of Credit Suisse executives
On Monday, several analysts issued a report backing up Credit Suisse executives, saying the bank has sufficient capital and liquidity to withstand the current uncertainty and market volatility. Citigroup analysts led by Andrew Coombs said in a note: “(Credit Suisse’s) liquidity position is very healthy. We believe the current rise 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 stocks and bonds might prompt the company to speed up announcing its capital plan. Analysts said: “We believe that if Credit Suisse can announce the capital increase in time, it will help restore the market’s confidence in the bank.” “Overweight” rating on senior holding bonds.
Analysts noted that the bank has 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 aimed to create a capital-light, advisory-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 Oct. 27.
2. Credit Suisse has options but it’s not easy
Credit Suisse, mired in a quagmire, has the potential to become the Lehman Brothers of 2008. However, in the eyes of analysts, Credit Suisse’s current situation 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 sparked in part by the U.S. Justice Department’s request for the bank to pay $14 billion to resolve an investigation into residential mortgage-backed securities. Investors’ concerns regarding the bank were not allayed until it raised 8 billion euros ($7.85 billion) in fresh capital in 2017, even following it finally struck a deal with the U.S. Justice Department for regarding $7 billion.
In 2011, rumours at the time that Morgan Stanley was heavily exposed to volatile European debt weighed on its stocks and bonds. Morgan Stanley’s biggest shareholder came out to publicly support the bank, and the crisis facing Morgan Stanley was lifted following the losses investors feared never materialized.
For now, Credit Suisse hopes to raise money by selling assets rather than through a highly dilutive rights issue like Deutsche Bank. “If one of the options includes financing, it’s always difficult for stocks to stabilize when the size of the potential offering and dilution is unknown,” said banking analyst Alison Williams. “Tough 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 securitized products business might be sold and balance sheet risk was reduced .
Credit Suisse’s proposed sale of its securitized 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, coupled with today’s bleak investment banking environment, selling these assets can still get 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 at that time,” said Andreas Venditti, an analyst at Vontobel Bank. Xin’s luck is even worse, as its focus is skewed toward the struggling investment banking business, including the leveraged lending division.”
Venditti believes that if Credit Suisse’s management does not take aggressive action to downsize the investment banking business, there will be a backlash from shareholders. That might 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 struggle to issue new shares to raise funds for a planned spin-off and its financing costs might 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 schedule, without having to endure another three weeks of market turmoil. JPMorgan analyst Kian Abouhossein hinted that the bank may announce its third-quarter capital position ahead of schedule to support a message to investors over the weekend that the bank’s balance sheet remains solid.
