by Martina Fuchs

ZURICH, Oct. 7 (Xinhua) -- Battered by scandals and losses, Credit Suisse, Switzerland's second-largest bank, is faced with a huge revamp and costly restructuring. According to analysts, the management has two choices: asset sales or a capital raising with investors.

The embattled banking giant, which has embarked on a massive strategic review under new Chief Executive Officer (CEO) Ulrich Koerner following a string of crises, such as a spying case and changes in senior leadership, plans to publish a progress update alongside its quarterly earnings on Oct. 27.

Since its foundation in 1856, Credit Suisse has played a central role in Switzerland's history and the country's development. But the Swiss clock is ticking and delivering a credible plan to turn around the business will be key to reassuring investors that the bank still stands on solid grounds.

"Credit Suisse is busy with a complex restructuring against a challenging macroeconomic backdrop and has suffered numerous risk management failures," Johann Scholtz, equity analyst at Morningstar based in Amsterdam, the Netherlands, told Xinhua via video conference. "We believe the bond market is looking for a capital raise to shore up confidence."

Scholtz, however, stressed that Credit Suisse was a "very well capitalized bank" and dismissed the idea that a "Lehman moment" could be on the horizon.

"We do not believe that Credit Suisse has a solvency problem. Its capital adequacy is in line with its peers. However, we think a capital raise is becoming more likely and needed."

Others, including Andreas Venditti, a senior analyst at Bank Vontobel, believe that asset sale would be the preferred option for the lender's leadership.

"Credit Suisse management will likely try everything to avoid a highly dilutive capital increase and would therefore prefer to sell assets," he told Xinhua via email.

However, if asset sale would not be possible at reasonable prices, Credit Suisse may still have to raise fresh capital, Venditti said. "I would not say that this is related to 'saving' the bank, but rather to provide sufficient funds for a profound and therefore expensive restructuring."

Meanwhile, Morningstar's Scholtz emphasized that an asset sale might not be sufficient:

"For equity investors, selling some assets would be more desirable as it would not come with the significant dilution that a capital raise will bring. However, we do not believe the assets earmarked for sale will generate enough surplus capital. The market will also view Credit Suisse as a forced seller, and it will have to sell at fire sale valuations."

Last month, the Zurich-based Credit Suisse announced it was "well on track with its comprehensive strategic review, including potential divestitures and asset sales" and that it would update the market when it reports third-quarter results on Oct. 27.

Credit Suisse said it was considering various measures to strengthen its wealth management franchise, transform the investment bank into a capital-light, advisory-led banking business, evaluate strategic options for the securitized products business, and reduce the group's absolute cost base to below 15.5 billion Swiss francs (15.6 billion U.S. dollars) in the medium term.

CREDIT RATING AND TRUST

The recent troubles at Credit Suisse include a spying scandal that forced former CEO Tidjane Thiam to quit in 2020 as well as a 5.5 billion U.S. dollar loss due to its risk exposure to U.S. hedge fund Archegos Capital Management, which defaulted in 2021.

In July this year, the group announced a major management reshuffle by appointing Koerner as new group CEO replacing Thomas Gottstein, who had resigned. In August, it then announced the appointments of Dixit Joshi as chief financial officer and Francesca McDonagh as group chief operating officer.

But it turns out that trust, in the end, is the most important capital for banks, and having a clear restructuring plan in place will be paramount.

Currently, all three major credit rating agencies -- Moody's, S&P and Fitch -- have a negative outlook on Credit Suisse.

"Ballooning CDS (credit default swap) spreads suggest Credit Suisse's credit rating is under threat, and we do not believe it can afford its rating to drop below investment grade," Scholtz argued, noting that it also needs to address concerns around revenue attrition and how it intends to retain talent and clients through the restructuring.

FINANCIAL SECTOR STABILITY

The 2008 global financial crisis has brought to the fore the significance of liquidity for the stability of systemically important banks and the entire Swiss economy, and the need to strengthen their crisis resilience to reduce the risk of economic turmoil.

The Swiss National Bank (SNB) has designated Credit Suisse, UBS, Raiffeisen Group, Zurcher Kantonalbank and PostFinance as systemically important banks.

In March this year, the Swiss Federal Council said it was planning to further expand its toolkit to strengthen the stability of the country's financial sector.

It defined key parameters for a so-called "public liquidity backstop," which would allow the Confederation and the SNB to bolster the liquidity of a systemically important bank that is in the process of resolution.

Asked whether a public liquidity backstop was needed at this stage, Scholtz said: "No. Credit Suisse does not have a solvency problem, it is suffering from a lack of confidence in the debt market. While it will be painful, we expect equity investors to back a capital raise." Enditem

Related

Go to Forum >>0 Comment(s)