Oct 5, 2022
Credit Suisse (CS) has been making headlines this week, and not for a good reason.
When the bank’s credit default swaps hit a record high, it sparked rumors that it could result in another Lehman Brothers moment. Credit default swaps are derivative products that serve as a form of insurance against a company defaulting on its debt.
Advertisement
Unsurprisingly, the company’s shares tumbled. But Jim Cramer is more optimistic.
“People keep talking about a Lehman moment,” he said earlier this week on CNBC. “I keep thinking, you’re finally going to be able to get a bank merger. And whoever gets Credit Suisse is going to do quite well if you cordon off those losses because boy, that is some great franchise.”
The stock did make a comeback on Tuesday but is still down more than 50% year to date.
So what does the future hold for Credit Suisse? Let’s see what other relatively bullish analysts on Wall Street are saying.
This is not 2008
Although Credit Suisse seems to have lost a lot of confidence from investors this year, Citi Research does not believe it’s going to be like the last financial crisis — which led to the Great Recession.
“We would be wary of drawing parallels with banks in 2008 or Deutsche Bank in 2016,” Citi Research says in a report.
The report points out that Credit Suisse has a tier 1 capital ratio of 13.5%, which is “high vs peers.”
The tier 1 capital ratio compares a bank’s core equity capital to its total risk-weighted assets. Citi Research says that a ratio of 13.5% allows Credit Suisse to have CHF2.5 billion of excess capital compared to a 12.5% ratio.
Advertisement
“The liquidity credit ratio at 191% is among best in class, with a Swiss Franc 235 billion high-quality liquid assets portfolio, so the liquidity position is very healthy,” the report continues.
“Rather than liquidity concerns, we see the current move in spreads as an inconvenience for funding costs.”
In other words, the challenge right now is that the bank could face higher financing costs.
Must Read
- Dave Ramsey warns nearly 50% of Americans are making 1 big Social Security mistake — are you doing the same?
- Thanks to Jeff Bezos, you can now become a landlord for as little as $100 — and no, you don't have to deal with tenants or fix freezers. Here's how
- Robert Kiyosaki says this 1 asset will surge 400% in a year and begs investors not to miss this ‘explosion’
Join 250,000+ readers and get Moneywise’s best stories and exclusive interviews first — clear insights curated and delivered weekly. Subscribe now.
‘Still a lot of value’
The widening spreads on Credit Suisse’s credit default swaps was likely the result of credit rating agencies having a negative outlook on the bank, according to DBRS Morningstar equity analyst Johann Scholtz.
Right now, Moody’s, S&P, and Fitch all have a negative outlook on Credit Suisse.
That said, Scholtz does not see a “Lehman moment” coming for the bank, and considers it a “very well capitalized bank.”
Advertisement
“Whilst there is a potential for new write-downs being announced by Credit Suisse at the end of the month when they’re coming up with results, there is nothing publicly available at the moment that indicates that those write-downs will be sufficient to actually cause solvency issues for Credit Suisse,” he tells CNBC on Tuesday.
The analyst adds that there is “still a lot of value” in the bank.
Mark this date
While market participants continue to speculate how things are going to unfold for Credit Suisse, the bank is not standing still.
Last week, Credit Suisse said that it is “well on track with its comprehensive strategic review including potential divestitures and asset sales.”
The company will provide an update about this strategic review on Oct. 27, which is also the date that it reports its third quarter financial results.
Credit Suisse CEO Ulrich Koerner reassured his staff about the bank’s capital base and liquidity position.
“I know it’s not easy to remain focused amid the many stories you read in the media — in particular, given the many factually inaccurate statements being made,” he said in a staff memo obtained by CNBC.
“That said, I trust that you are not confusing our day-to-day stock price performance with the strong capital base and liquidity position of the bank.”
You May Also Like
- Turning 50 with $0 saved for retirement? Most people don’t realize they’re actually just entering their prime earning decade. Here are 6 ways to catch up fast
- Inside a $1B real estate fund offering access to thousands of income-producing rental properties — with flexible minimums starting at $10
- Vanguard’s outlook on U.S. stocks is raising alarm bells for retirees. Here’s why and how to protect yourself
- Here are 5 easy ways to own multiple properties like Bezos and Beyoncé. You can start with $10 (and no, you don’t have to manage a single thing)
Jing is an investment reporter for MoneyWise. He is an avid advocate of investing for passive income. Despite the ups and downs he’s been through with the markets, Jing believes that you can generate a steadily increasing income stream by investing in high quality companies.
