Last week, Credit Suisse’s credit default swap spreads surged to record levels over concerns about its financial health and funding for its restructuring. What say the banks on Switzerland’s most troubled lender?
Credit Suisse’s credit default swap (CDS) spreads spiked last Monday to 355 basis points (bps) – up from 57 bps at the start of the year and the highest level in at least two decades. This sparked further concerns about the troubled Swiss lender’s financial health and would subsequently lead to an announcement of debt repurchase offers totalling $3 billion.
But there are still unanswered questions, most notably doubts about how the bank will finance its long-awaited restructuring. Media reports are claiming that Credit Suisse is already exploring new capital by sounding out investors for its third round of fundraising since 2015 as well as seeking external investors for a spin-off of its advisory and investment banking business.
CDS Spike Shrugged Off
Compared to global markets and media, banks were relatively unshaken by last week’s CDS spread spike alongside other ongoing worries.
According to a note by JP Morgan analyst Kian Abouhossein, Credit Suisse’s financial position in end-June was «healthy» with a common equity tier-1 ratio of 13.5 percent and a liquidity coverage ratio of 191 percent. Citigroup analyst Andrew Coombs echoed the sentiments and warned against making comparisons to the global financial crisis or Deutsche Bank’s sharp bond sell-off in 2016 which led to concerns about potentially skipped coupon payments and CDS volatility.
«We would be wary of drawing parallels with banks in 2008 or Deutsche Bank in 2016,» Coombs said, noting that Credit Suisse’s capital ratio is relatively higher compared with peers. «The market appears to be pricing in a highly dilutive capital raise. We do not think this is a foregone conclusion, so would argue Credit Suisse is a buy for the brave at these levels.»
Restructuring Costs
Despite reports about the need for external investors, Societe Generale analysts said in a note last week that Credit Suisse could self-fund an aggressive restructuring without additional capital, adding that the recent stock decline reflected management leading towards retaining investment bank trading operations and reports of First Boston’s brand revival.
Deutsche Bank was less sanguine, underlining in a note in August that the Swiss lender faced a capital gap of at least 4 billion Swiss francs ($4.1 billion). The gap could be reduced by the sale of its securitized products business, which is estimated to free up about 3 billion Swiss francs by book value, though there could be «some execution risks» to the deal.
Switzerland: Not Taking Chances
While global banks are optimistic about Credit Suisse's financial health, authorities in Switzerland are not taking any chances.
In March, the Swiss government voted for the introduction of a public liquidity backdrop for systemically-relevant banks and commissioned the Ministry of Finance to work out policy details until mid-2023. Separately, the Swiss National Bank has also said that it is monitoring the situation closely.
Credit Suisse’s much anticipated strategic review is due to be announced on October 27.
