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Is the collapse of Credit Suisse really imminent? The bank is taking important steps to calm the situation and, above…

Jamie Cameron
12. 10. 2022
5 min read

I have already discussed the Credit Suisse issue in one of my recent articles, focusing on a number of scandals and events that are leading investors to worry. But are these fears misplaced? On Friday, Credit Suisse shares gained a positive 13%, which of course has a reason, which we'll look at today. Is this a hint for an improvement in the whole situation?

Credit Suisse

As a minor reminder, Credit Suisse, one of Europe's largest banks, is struggling to recover from a series of scandals, including losing more than $5 billion from the collapse of investment firm Archegos last year, when it also had to suspend client funds linked to failed financier Greensill. But that's only part of the problems I discuss in my previous article 👇

Credit Suisse scandals and issues: the Lehman Brothers bankruptcy in 2008 was a weak brew compared to the current Credit Suisse issues | Bulios

What happened? Why did $CS+1.0% stock skyrocket?

Credit Suisse will buy back up to 3 billion Swiss francs ($3 billion) in debt, an attempt by the Swiss bank to show its financial strength and reassure worried investors.

Speculation about the bank's future has gathered pace on social media in the past week amid expectations that it may have to raise billions of francs in capital, sending its shares and some bonds to new lows.

The buyback reduces the bank's debts and is an attempt to boost confidence. But central questions about its restructuring - and whether or not it will need new capital to fund it - remain open.

  • In an effort to underline this, the bank said the buyback "will allow us to take advantage of market conditions to repurchase debt at attractive prices".

The debt buyback marks an important step and a move to reassure investors as the bank prepares to transform itself into a smaller and safer bank.

The capital position is a major concern for $CS+1.0%, which has been questioned for several quarters in a row. Meanwhile, the bank's earnings have also been falling for a long time, putting it at the center of speculation, with investors looking for trouble and possible cover-ups by the bank. Whatever the truth, the concerns are misplaced, there have been enough scandals in recent years.

The debt buyout immediately weighed on the performance of $CS+1.0% stock (+13%).

  • By reducing the debt burden, Credit Suisse is not only trying to boost confidence, but also strengthen its own stock, which has fallen significantly since the beginning of the year, writing off over 51%.

"This is an opportunistic move to take advantage of market conditions, which may be reassuring for some investors," commented Vontobel analyst Andreas Venditti.

The bank's management spent last weekend reassuring large clients and investors of its financial strength. Chief Executive Ulrich Koerner also told staff that the bank had sufficient capital and liquidity.

CEO Koerner's comments were in response to the price of the bank's bankruptcy insurance, which began to rise significantly last week. The price of so-called credit swaps, which are the basis for the cost of bankruptcy insurance, rose 15% last week, the highest since 2009, the height of the global financial crisis.

  • But on Friday, the price of Credit Suisse's five-year credit default swaps fell 24.5 basis points to 311.5 basis points, indicating increased confidence in the bank.

What are the expectations?

Ratings agency Moody's expects Credit Suisse's losses to rise to $3 billion by the end of the year, potentially reducing its core capital below the key 13% level, a senior analyst at Moody's said.

Meanwhile, the bank is working on a possible sale of some assets and businesses in an effort to return to profitability. For example, it will put its famous Savoy hotel in Zurich up for sale, which could fetch it around 400 million francs, according to Swiss media.

"Furthermore, CS should see a capital gain as its senior unsecured bonds are trading at around 75 cents on the dollar. The capital gain will strengthen CS's capital position, which is credit positive," said Moody's analyst Alessandro Roccati.

  • We don't know the specific plan and next steps yet, but Credit Suisse will clarify the whole situation on October 27.

Conclusion

Credit Suisse has indeed experienced many problems and investor confidence is very shaky. It doesn't help the situation that important employees and long-time executives are fleeing and moving on to other jobs, fueling bankruptcy speculation much more - Is there something going on inside? Is there something going on inside that the public doesn't know about? Why are profits still falling? This is exactly what is often discussed among investors. However, we have to take into account that the bank and its CEO still believe in weathering this situation calmly and are taking important steps that are reaping success so far, plus the price of five-year credit default swaps fell on Friday, which is also positive. However, I dare not get ahead of myself and make an assessment, and for now I am on the side of the observer who is not investing in this bank (I may be missing an investment opportunity by doing so).

  • What is your opinion on this? Do you buy shares of $CS+1.0%?

Please note that this is not financial advice. Every investment must go through a thorough analysis.

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