Credit Suisse hit by stock and credit downgrades after profit slump

Speculation has emerged in recent months that Credit Suisse may be considering a capital raise.

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Shares of Credit Suisse fell on Wednesday after Goldman Sachs downgraded the stock to “sell” following credit rating downgrades from Moody’s and S&P.

Shares of the troubled Swiss lender fell slightly in early afternoon trading in London, having recouped some of their earlier losses, and remain down more than 42% since the start of the year, as the new CEO Ulrich Koerner takes the reins following the resignation of Thomas Gottstein last week.

The bank announced a new strategic review after announcing a net loss of 1.593 billion Swiss francs ($1.66 billion) in the second quarter, well below consensus, as poor performance by investment banks and the higher litigation provisions weighed on earnings.

Goldman Sachs noted on Tuesday that Credit Suisse has underperformed the rest of the sector by 59% since the start of 2021, due to company-specific events and sector-wide revenue headwinds.

The Wall Street giant expects this underperformance to continue over the next 12 months as investment banking returns remain weak through 2024, and forecasts a pause in asset management performance. short-term wealth due to outflows and poor market performance.

“With respect to capital, although we do not expect any shortfall in the near term, organic capital generation is below peers and RWAs (risk-weighted assets), inflation plus litigation plus restructuring have the potential to further deplete capital at a relatively low buffer relative to regulatory minimums,” Chief Executive Chris Hallam and his team said in the Tuesday note.

Despite the brighter picture Goldman sees in the European banking space – in which higher interest rates will boost revenue and return expectations, reinvestment in new technology will improve returns and excess capital can be distributed to shareholders – Credit Suisse is valued roughly in line with the industry currently.

“Our revised 12-month price target implies a 5% upside, but in the context of around 60% upside on average across our banking coverage, this equates to a significant underperformance: in Accordingly, we are downgrading the stock to Sell from Neutral,” Goldman said. .

Credit Downgrades

Moody’s downgraded Credit Suisse’s senior unsecured debt and deposit rating by one notch on Monday and maintained a negative outlook on the bank’s credit trajectory.

“CS’s ratings downgrade reflects the challenges the group faces in successfully completing the previously announced repositioning of its investment bank in a more challenging macroeconomic and market environment, as well as uncertainty over the business and financial implications. the group’s plans to take further steps to achieve a more stable, small-cap and better-aligned investment banking business,” Moody’s said in its update.

The rating agency also cited “the crystallization of significant financial losses in the first half of 2022, leading to stress on the bank’s financial profile and potential delays in technology investments, as well as in the transformation of the company and an expectation of still weak performance in 2022”.

In addition, Moody’s highlighted evidence of an erosion of Credit Suisse’s market share and “franchise write-down” in its investment bank, following the deleveraging of its capital-intensive businesses and upon leaving its prime brokerage activity.

The ongoing overhaul of its risk and compliance operations is “long and resource intensive”, while stabilizing the group under new management and a new management team will take time, Moody’s said.

“These factors are partially mitigated by the company’s strong – albeit shrinking – capitalization and strong liquidity and funding profiles,” he added.

Credit Suisse Chairman Axel Lehmann told CNBC last week that the new strategic review would aim to accelerate restructuring efforts.

The review will aim to significantly reduce the group’s cost base, strengthen its wealth management, Swiss banking and asset management businesses, and transform investment banking into a small-cap banking business, focused advisory and more market-oriented.

However, Moody’s cited uncertainty about the bank’s “ability to successfully execute” the “to-be-defined” restructuring strategy, as well as “governance deficiencies and senior management instability”, in a downgrade. up a notch in corporate behavior on the Credit Suisse scorecard. .

S&P Global Ratings on Monday revised its outlook on Credit Suisse to negative, citing growing risks to the stability of the bank’s franchise, uncertainty around the senior executive reshuffle and a “lack of clear strategy”, as well as persistent low profitability over the medium term.

“The negative outlook reflects the setbacks Credit Suisse may face in revamping its strategy, with new management at the helm, to transform the bank in an increasingly challenging operating environment,” S&P said.

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