Credit Suisse hit with equity and credit downgrades after the slump in earnings

In recent months, speculations have emerged that Credit Suisse might consider a capital increase.

Thi My Lien Nguyen | Bloomberg | Getty Images

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

Shares of the ailing Swiss lender fell slightly from early afternoon trading in London, after recouping some of its earlier losses, and remain down more than 42% year to date as new CEO Ulrich Koerner takes the reins following the resignation of Thomas Gottstein last week.

The bank announced a new strategic review after reporting a net loss in the second quarter of 1.593 billion Swiss francs ($ 1.66 billion), well below consensus as the investment bank’s poor performance and growing litigation provisions have hammered profits.

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

The Wall Street giant expects this underperformance to continue over the next 12 months as investment bank yields remain suppressed until 2024 and expects a pause in short-term asset management performance due to outflows and weak market performance.

“As far as capital is concerned, even if we do not foresee any short-term deficit, organic generation of capital is below peers and RWAs (risk-weighted assets), inflation plus litigation plus restructuring has the potential to further deplete capital down to a relatively low buffer compared to regulatory lows, ”Executive Director Chris Hallam and his team said in Tuesday’s statement.

Despite the more favorable picture Goldman sees across the European banking space – where higher interest rates will boost revenue and yield expectations, reinvestment in new technologies will improve returns and excess capital can be distributed to shareholders – Credit Suisse is rated roughly in line with the industry at present.

“Our 12-month revised price target implies a 5% rise, but in the context of an average rise of around 60% across our entire bank coverage, this equates to significant underperformance: as a result, we downgrade the stock to Sell. from Neutral, “Goldman said.

Credit downgrades

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

“CS’s rating downgrade reflects the challenges the group is facing to successfully complete the previously announced repositioning of its investment bank in the more difficult macroeconomic and market environment, as well as uncertainty about the economic and financial implications of the The group plans to take further steps to achieve a more stable, capital-friendly and better aligned investment banking business, ”Moody’s said in its update.

The rating agency also cited “the crystallization of large financial losses during the first half of 2022, resulting in stress on the bank’s financial profile and potential delays in technology investments, as well as in business transformation and in the expectation of continued weak performance. in 2022 “.

Additionally, Moody’s highlighted the erosion of Credit Suisse’s market share and the “franchise devaluation” in its investment bank, following the deleveraging of its capital-intensive businesses and the exit from its prime business. brokerage.

The ongoing review of its risk and compliance operations is “time consuming and resource intensive,” while stabilizing the group under new leadership and a new team of senior executives will take time, Moody’s said.

“These factors are partially mitigated by the firm – albeit declining – capitalization of the company and strong liquidity and financing profiles,” he added.

Credit Suisse President Axel Lehmann told CNBC last week that the new strategic review will seek to accelerate restructuring efforts.

The review will aim to drastically reduce the group’s cost base, strengthen its Swiss wealth management, banking and wealth management operations, and transform the investment bank into a capital-friendly, advisory-led banking business with greater attention to the markets.

However, Moody’s cited uncertainty about the bank’s “ability to successfully execute” the bank’s “yet to be defined” restructuring strategy, coupled with “governance deficiencies and top management instability,” in a one-level downgrade for behavior. on the Credit Suisse scorecard.

S&P Global Ratings revised its outlook on Credit Suisse negatively on Monday, citing growing risks to the stability of the bank’s franchise, uncertainty about the reshuffling of top executives and a “lack of a clear strategy”, coupled with continued weak profitability over the course of the year. middle term.

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

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