Credit Suisse Group AG needs to show a few quarters of solid earnings before the market can start buying into its promise of a successful turnaround because of its poor track-record of restructuring, according to analysts.
Switzerland's second-largest bank is struggling to turn the corner after three years of continuous crises, having updated its strategic plans several times amid a widespread overhaul of its senior management. The group is expected to present a new revamp plan on Oct. 27, after appointing Ulrich Körner as its new CEO in late July to lead yet another turnaround.
Analysts have questioned the group's ability to execute its strategic plans given the frequent leadership changes, reputational damage suffered from the collapses of U.S. hedge fund Archegos Capital and financial services firm Greensill Capital (UK) Ltd., and the worsening economic environment.
"We remain skeptical of any restructuring exercise by the company [and] ... prefer to see some positive results before buying in," CFRA Research equity analyst Firdaus Ibrahim said in a written comment.
Analysts have been sharply cutting 2022 revenue and profit estimates for Credit Suisse since the beginning of the year, with the latest series of cuts following the bank's second-quarter earnings and the CEO change in July, S&P Global Market Intelligence data shows.
Credit Suisse has said its strategy update would focus on a further restructuring of the investment bank, aimed at reducing capital allocation to the unit and enhancing its contribution to the wealth management and Swiss private banking divisions.
Capital raise
Credit Suisse is reportedly mulling over a potential break-up of the investment bank and sale of businesses that do not fit with the group's pivot toward wealth management, asset management and private banking. The proceeds from future disposals could be used to fund additional restructuring measures, but Credit Suisse might also need to raise additional capital — something that has not gone down well with investors.
RBC Capital Markets equity analysts have estimated that Credit Suisse would need between CHF4 billion and CHF6 billion of capital to pre-finance its restructuring and provide buffers against capital headwinds.
A capital raise would help cover higher restructuring costs and investments to grow other business lines, but the share dilution means Credit Suisse would need to deliver higher profits to make any restructuring plan an attractive proposition, Ibrahim said. "The recent share price drop is an indication that investors and the market are not convinced," he said.
Market jitters
Credit Suisse's shares have lost over 22% of their market value in the past month and were trading more than 8% lower on Oct. 3. The stock has dropped by nearly 56% year-to-date.
The bank's stock price and price-to-book value hit their lowest level in 10 years, at CHF3.65 and 0.23x, respectively, Market Intelligence data shows.
CEO Ulrich Körner warned staff in a recent memo against conflating share price moves with the bank's capital and liquidity position. The bank's management also sought to reassure clients and investors in a round of phone calls over the past weekend, the Wall Street Journal reported.
Nevertheless, credit default swap spreads on Credit Suisse's five-year senior debt hit their highest level since 2009, well above the CDS spreads of financial sector peers with the same credit rating and domestic rival UBS Group AG. CDSs are used to hedge risk against a company's default: the higher the spreads, the higher the perceived risk of default, and the costlier it is for the company to raise new funding.
Funding costs have increased for all banks so far in 2022, driven by rising interest rates and a declining economic outlook, RBC Capital Markets analysts said in a Sept. 21 note. Compared with peers, however, Credit Suisse has faced the largest CDS spread surge, "indicating that company-specific factors are more prevalent," the analysts said.
The latest drops in Credit Suisse's bond prices, which are also at record lows, "seem overdone" given the bank's solid capital and liquidity, Joost Beaumont, senior fixed income strategist at ABN AMRO, wrote in an Oct. 3 note. Market reaction appears to reflect fear surrounding execution risks relating to upcoming divestments, rather than any new information about the bank's strategic review, Beaumont said.
Credit Suisse's stock pared some of its losses on Oct. 4, but it remains at historic lows.
'Identity crisis'
Speculation about the course of Credit Suisse's restructuring has intensified in the last two months, with the group reportedly considering a wide range of scenarios. These range from a split-up of the investment bank and a potential exit of the U.S. market, to the resurrection of the group's original investment banking brand, First Boston, and to the creation of a bad bank unit for risky assets.
Credit Suisse is not exiting the U.S. market, a spokesperson for the bank told Market Intelligence, and "any reporting that suggests otherwise is categorically false and completely unfounded."
With all the rumored directions Credit Suisse could take, the group appears to be "in the middle of an identity crisis," struggling to decide on its future course, Ibrahim said. The presentation of a "convincing" restructuring plan on Oct. 27 would help ease market worries, but the bank still needs to show some progress in execution to turn market sentiment around, he said.
CFRA expects Credit Suisse's share price to remain under pressure in the foreseeable future. Even with the depressed valuation, Ibrahim does not see the bank as an attractive M&A target.
The spokesperson declined to comment on the new restructuring plan, reiterating a recent statement of the Swiss group that it "would be premature to comment on any potential outcomes" before Oct. 27.
Equity analysts at JP Morgan, however, have suggested that Credit Suisse might bring forward the strategy update in order to ease market concerns about its capital position, Dow Jones Newswires reported Oct. 3.