Credit Suisse Needs Capital Raise or Breakup, Morningstar Says
Comment of the Day

March 15 2023

Commentary by Eoin Treacy

Credit Suisse Needs Capital Raise or Breakup, Morningstar Says

This article from Morningstar may be of interest. Here it is in full: 

Credit Suisse Group AG’s funding costs have become so high it either needs to raise more capital or face a break up, Morningstar analyst Johann Scholtz said in a note on Wednesday. 

“We expect the 2023 loss to increase to such an extent that its capital adequacy could be under threat,” Scholz wrote in the note. “We believe Credit Suisse needs another rights issue.”

The alternative would be “a breakup” of the bank in which its various business lines such as the Swiss unit, asset manager and wealth management divisions could be “sold or listed separately.”

Credit Suisse has sufficient liquidity to handle the outflow of deposits and should also be able to get emergency liquidity from the Swiss National Bank by borrowing against its bond portfolio, Scholz wrote in the note. “However, this does not solve Credit Suisse’s profitability challenge, nor does it address capital concerns.”

Credit Suisse’s stock plunged as much as 30.8% on Wednesday to the lowest level on record, while some of its bonds dropped to levels that signal financial distress as the company’s top shareholder ruled out increasing its stake because of regulatory constraints. The plunge helped drag all European lenders lower as investors were quick to move away from banking risk after turmoil induced by the collapse of California-based Silicon Valley Bank. 

The Swiss lender’s Chief Executive Officer Ulrich Koerner on Tuesday preached patience and said the bank’s financial position is sound while Chairman Axel Lehmann said Wednesday that government assistance “isn’t a topic.” He also said it wouldn’t be accurate to compare Credit Suisse’s efforts to return to profitability with the recent collapse of Silicon Valley Bank.

Eoin Treacy's view

A decade of negative deposit rates hollowed out the business models of many banks. That left the holders of bonds in a uniquely unfavourable position as interest rates backed up. Tighter liquidity conditions make every type of leveraged bet look foolish. Credit Suisse resorted to taking risky bets which have come undone one after another over the last few years as the pandemic and inflation drove risk premia higher.

The big question now is whether Credit Suisse’s price adequately reflects the outstanding risk. It could easily be worth more following a breakup. There was news yesterday they expect to sell off First Boston next year. It could happen a lot sooner than that.
The share has accelerated lower so there has been a lot of panicky selling. If the issue is profitability rather than liquidity, it is reasonable to expect a lot of the selling pressure has already taken place. That suggests today’s steep decline could have marked the low. A clear upward dynamic will be required to confirm that hypothesis. 

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