Credit Suisse
Credit Suisse

Credit Suisse

by @goodalexander

Credit Suisse. Below I will summarize what has happened and what I think the implications are. 1/ Credit Suisse options price an explosive equity move over the next 3 months. Implied vol of 61 at decade highs imply moves 2x US financials. Bonds and CDS paint a similar story.

2/ CDS are a bit hard to understand, so instead I’ll focus on the bonds. The 2025 Credit Suisse bonds pictured below trade at 6.4%. Compare this, for example to Ukraine 2025 debt trading at 67%. Talking about Ukrainian debt default makes sense. CS debt default – less so.

3/ CS bonds are not pricing a pending credit event because as of the July Quarter, CS’s CET1 capital adequacy was at 13.5% – within the bank’s own target and well above the 8% intl regulatory requirement or the 10% Swiss hurdle. In the pre 08′ era, sub 5% CET1s were common.
4/ That said, Körner’s Friday comments “No doubt there will be more noise in the markets and the press between now and the end of October. All I can tell you is to remain disciplined and stay as close as ever to your clients.” did not sound great for equity holders. For context –

5/ CS results have 4 levers. A] a Swiss bank and wealth arm serving rich folk. Doing great B] an investment bank that’s losing share with no prime brokerage due to Bill Hwang’s blow up C] big legal liability and fines from B D] A flailing fund distribution suite, “AllFunds”

6/ The drop in CS stock price has coincided with declining earnings expectations. In 2021 analysts forecast 2.00 a share of ’23 eps and now only expect .64 (a 68% decline). CS price to book is similar to Deutsche Bank or 1/6 of JPM’s, and 1/3 of HSBC’s. How did we get here?
7/ First – the Swiss bank benefits from higher CHF rates (est. +800M/year benefit to 2024 income). It saw +3.4CHF B of net inflows ytd even with 1.9CHF Billion of Russian outflows. The big growth area is China. CS reinvested pnl from higher rates in courting Chinese clients.
8/ The Swiss bank has a bolted-on wealth manager. Asian clients did 3x the volume for CS as Americans did in the first half – hence their focus (but also now probably a risk). Bc markets tanked, wealth fees were down 74% year on year while transactions were only down 16%.
9/ That nice $114m of PTI in 2Q from wealth mgmt was entirely eaten by a $245m blow up in the Lev Fin group in the ibank. That and a hard comp from derivs trading left markets revs down 96%. the $342m/quarter run rate in equities won’t bounce bc it shut down hedge fund services.

10/ It’s probably worth pointing out here that the equities group (Prime Services) that blew up CS to the tune of $5.5 billion (over 1/2 of the bank’s current market cap) servicing Bill Hwang – is separate from the derivatives group the bank plans on spinning off in Late October

11/ There are 2 quite scary things about the outlook for CS ibank when you delve a bit. First: the -32% comp on Fixed Income pnl was due to slowing bond issuance. Citrix & other deal pulls are crushing issuance volumes with Sept’s $75b of deals 50% below expects

12/ Second – when management talks about the “credit spread mark to market losses” of $245m they said “the majority of these losses are unrealized”. And then they get a follow up question where it seems like the plan was to hope credit spreads narrow. That hasn’t happened.

13/ the FT reported that the bank’s plan for dealing with the LevFin losses is to package them into some kind of “bad bank” separate from other assets in the investment bank and let investors bid on that separately, presumably at a steep discount.

14/ And the last time they talked about the LevFin losses, the Citrix deal hadn’t even happened yet. CS was involved in a block sale for Citrix bonds which faltered leaving banks holding a $6.5 b bag they lost $600m on. And since then, the $4b Brightspeed deal has also died

15/ At this point it should probably be clear CS has a culture problem. Not to mention legal problems of $1b+ in 1H 2022. Notably, the current lawsuit from a Georgian prime minister deal with inept / dishonest foreign wealth practices not trading.

16/ The ex prime minister of Georgia, Ivanishvili, had a CS banker Patrice Lescaudron who lost his $, covered it up, got convicted of fraud in 2018, sent to jail, released then killed himself after being released in 2020. The NYT reported this is a pattern

17/ The war on Ukraine & US sanctions will add scrutiny on ‘cover banking operations’ at CS. And doubling down on the Chinese market is likely quite risky. Due to collapsing foreign inflows, on Friday the Chinese regulator announced a crackdown on outflows

18/ That leaves a pretty nasty set up into the Q3 ‘plan announcement’ later this month. The leveraged finance group probably lost even more $. And other banks won’t have risk appetite for a structured products group given what’s happening in mortgages/ other credit markets

19/ The giant legal liabilities management tries to avoid discussing are in fact a structural part of Credit Suisse’s business model – and doubling down on Chinese wealth mgmt could anger both CCP officials as well as US regulators into an extremely sensitive time (Xi’s 3rd term)

20/ am I jumping up and down to ‘fade the CS panic’? no Is it Lehman? no. Lehman was the cause, CS is a casualty Could the stock go to zero bc of bond market liquidity issues compounding its asset sale plan? yes – which is probably relevant to ‘financial stability’ narrative