Citi's view on Credit Suisse

According to Citigroup, Credit Suisse has Common Equity Tier 1 (CET1) ratio of 13.5%, which is highest as compared to its peers. The CET1 ratio compares a bank's capital against its risk-weighted assets to determine its ability to withstand financial distress. The bank’s liquidity coverage ratio (LCR), a proportion of highly liquid assets held by financial institutions to meet short-term obligations, stood at 191%, which is among best in class and indicates that the liquidity position is very healthy.

Citigroup says the bank’s widening credit default swaps (CDS) is a major concern for the private bank as it raises the risk of default on the contract. A CDR is a financial contract between two parties—protection buyer and protection seller – which is used to transfer and manage credit risk in an effective manner through redistribution of risk. A higher CDR cost can lead to bankruptcy if the buyer fails to pay interest or principles to the seller.

“In the short-term widening credit spreads can exacerbate market fears, result in negative press coverage and damage counterparty confidence, as well as drive funding costs higher. In the long-term the further the share price falls the more dilutive any capital raise becomes (and vice versa), which constrains the magnitude of any investment banking restructuring that CS can undertake,” Citi says in its report.

On restructuring of the bank, the brokerage said that an exit from securitised products is plausible without the need for a capital raise. “However a broader exit (e.g. from leveraged finance and credit too) could prove more costly and push the bank into needing more capital. The current multiple therefore constrains the new management’s ability to restructure the investment bank and we fear the tail will continue to wag the dog (we already apply a negative value to the investment bank in our SOTP valuation),” it adds.

The brokerage says that Credit Suisse stock is a “buy for the brave” at current levels, but headline news flow is likely to remain negative, and the agency does see significant execution risk in any new strategic plan.

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