How big is the capital hole at Credit Suisse?

Credit Suisse has battled rumors on social media about the strength of its balance sheet in recent days, trying to convince investors and clients that the stock’s plunge and skyrocketing credit default swaps aren’t the real story of the bank’s health tell.

At the heart of the storm is a simple question that analysts and market commentators have been asking since Credit Suisse announced last summer that it would downsize its investment bank and save CHF 1.5 billion in costs: How big will the capital hole actually be? be?

Last month, analysts at Deutsche Bank estimated that the drastic moves would require the Swiss lender to raise an additional SFr4 billion due to restructuring costs, the need to expand other businesses and regulatory pressure to bolster its capital ratios.

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As of Friday, analysts at Keefe, Bruyette & Woods put the figure at SFr6 billion. They argued that this would result in Credit Suisse demanding CHF 4 billion in capital from investors following the sale of assets “to accommodate a clear growth plan and/or to offset unknown factors such as litigation or fears of client churn.” .

For a bank whose market cap has shrunk to CHF 10 billion in recent weeks after falling 25 percent, the prospect of taking on investors already suffering losses from scandals like Archegos and Greensill seems increasingly daunting .

Senior officials at the bank – which has said it will come up with a detailed plan for its slimmed-down investment bank by the end of the month – are adamant a capital raise would be the last resort.

“Let me be clear that we didn’t scout investors for capital,” said one banker, who spent the weekend calling top clients and counterparties to reassure them of the bank’s financial health.

“We’re going to be selling and divesting assets just so we can fund this very strong pivot that we’re looking to achieve towards a stable business.”

The bank plans to sell parts of its investment bank – potentially including its valuable securitized products business – which analysts say could raise as much as CHF 2 billion.

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Credit Suisse managers were forced on the charm offensive following a widening in spreads on the group’s credit default swaps last week, suggesting that investors were becoming increasingly bearish on the group. Over the weekend, social media and web forums were buzzing with rumors of the bank’s impending collapse.

On Monday it became clear that the bank’s communication campaign could not calm the nervous markets. Traders and investors rushed to sell Credit Suisse stocks and bonds while buying CDS.

Credit Suisse’s five-year CDS is up more than 100 basis points on Monday, with some traders listing it as high as 350bps, according to the Financial Times. Shares of the bank fell to historic lows of under 3.60 Swiss francs, down nearly 10 percent on market open.

The two issues of most concern to investors and social media commentators are the bank’s capitalization, which reflects its ability to absorb losses, and its liquidity levels, which would be tested in short-term periods of stress. The bank insists that neither poses a risk.

In its latest quarterly results in July, Credit Suisse reported a core capital ratio of 13.5 percent, reflecting its financial resilience, well below its target of 13-14 percent for this year. This is an increase of 11.4 percent in 2015 and 12.9 percent in 2020 and corresponds to a capital of 37 billion Swiss francs.

Compared to other European banks, Credit Suisse has a similar CET1 ratio as UBS, HSBC, Deutsche Bank and BNP Paribas.

In addition, the bank has CHF15.7 billion in additional Tier 1 capital, which is being raised through the issuance of so-called “contingent convertibles” bonds — or cocos because they can be converted into equity in times of stress.

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Credit Suisse raised $1.5 billion in AT1 capital over the summer, with a bond offering that yielded 9.75 percent. While the issue looked expensive at the time, several credit agencies have since downgraded the bank and the bond currently trades at a yield of 12.5 percent.

In addition, at its latest financial results, the bank had CHF44.2 billion in gone-concern capital, which is additional capital required by Swiss regulators to absorb losses without triggering bankruptcy.

“We’d have to burn 97 billion Swiss francs of capital before anything happens to customers or employees,” said a senior Credit Suisse executive, adding up CET1, AT1 and gone-concern capital. “UBS burned billions during the financial crisis and was rescued. This is not Credit Suisse today.”

Comparisons were also drawn over the weekend to the sharp sell-off in Deutsche Bank’s debt in 2016, when concerns that Deutsche Bank would have to miss some coupon payments on its principal issues led to sharp moves in the CDS market.

“We would be wary of drawing parallels to banks in 2008 or Deutsche Bank in 2016,” said Citigroup analyst Andrew Coombs.

“The market seems to be pricing in a highly dilutive capital raise. We don’t think this is a foregone conclusion and would therefore argue that Credit Suisse is a bold buy at these levels.”

In terms of bank liquidity, Credit Suisse has a liquidity coverage ratio of 191 percent, which is significantly higher than most of its peers. The ratio reflects the amount of highly liquid financial assets held by the bank that can be used to meet short-term obligations.

“From our perspective, looking at the company’s financial position at the end of the second quarter, we view Credit Suisse’s capital and liquidity position as healthy,” said JPMorgan analyst Kian Abouhossein.

At the end of Monday, the bank’s shareholders were reassured by the reassuring reports from the analysts, even if calls for an early unveiling of the new strategic plan were getting louder and louder. By the time the Zurich market closed, Credit Suisse shares had recovered to roughly where they started the day at CHF 4.

Meanwhile in Australia, an ABC business journalist who sent a widely shared tweet on Saturday suggesting a major international investment bank was “on the brink” deleted the post, his employer said it had reminded him of that its social media policies.

Video: Credit Suisse: what’s next for the crisis-ridden bank? | FT movie How big is the capital hole at Credit Suisse?

Adam Bradshaw

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