How big is the capital hole at Credit Suisse?

Keystone / Urs Flueeler

Credit Suisse has spent the past few days battling social media rumours about the strength of its balance sheet and trying to convince investors and clients that its plummeting share price and spiking credit default swaps are not telling the true story of the bank’s health.

At the centre of the storm is a simple question that analysts and market commentators have been asking ever since Credit Suisse announced over the summer that it would strip back its investment bank and cut out CHF1.5 billion ($1.5 billion) of costs: how big will the capital hole actually be?

Last month analysts at Deutsche Bank estimated the drastic moves would leave the Swiss lender needing to find an additional CHF4 billion due to restructuring costs, the need to grow other business lines and regulatory pressure to strengthen its capital ratios.

By Friday, analysts at Keefe, Bruyette & Woods were putting the figure at CHF6 billion. They argued this would leave Credit Suisse, after asset sales, asking investors for CHF4 billion of capital “to accommodate a clear growth plan and/or offset any unknowns such as litigation or client attrition fears”.

For a bank whose market capitalisation has shrunk to CHF10 billion in recent weeks following a 25% share price drop, the prospect of going cap in hand to investors, who have already had to weather losses from scandals like Archegos and Greensill, seems increasingly daunting.

Senior executives within the bank — which has said it will unveil a detailed plan for its stripped-down investment bank by the end of the month — are adamant a capital raise would be a last resort.

“I want to be clear, we have not sounded out investors for capital,” said one banker who spent the weekend calling top clients and counterparties trying to reassure them of the bank’s financial health.

“We will be doing asset sales and divestitures just so we can fund this very strong pivot we intend to achieve towards a stable business.”

The bank plans to sell parts of its investment bank — potentially including its prized securitised products business — which analysts said could raise up to CHF2 billion.

Charm offensive

Credit Suisse managers had been forced into the charm offensive following a spike in spreads on the group’s credit default swaps last week, which indicated investors were becoming increasingly bearish on the group. Over the weekend social media and web forums were awash with rumours about the bank’s imminent collapse.

By Monday it had become clear the bank’s communication campaign had failed to calm jittery markets. Traders and investors rushed to sell Credit Suisse’s shares and bonds while buying CDSs.

Credit Suisse’s five-year CDS soared by more than 100 basis points on Monday, with some traders quoting it as high as 350bp, according to quotes seen by the Financial Times. The bank’s shares tumbled to historic lows of below CHF3.60, down close to 10% when the market opened.

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

Last quarterly figures

At its last quarterly results in July, Credit Suisse reported a common equity tier one ratio, which reflects its financial resilience, of 13.5%, well within its target of 13-14% for this year. That is up from 11.4% in 2015 and 12.9% in 2020, and equates to CHF37 billion of capital.

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

On top of that, the bank has CHF15.7 billion of additional tier one capital, which is raised from issuing so-called “contingent convertibles” bonds — or cocos because they can be converted into equity in times of stress.

Credit Suisse raised $1.5 billion of AT1 capital over the summer, with a bond offering that paid 9.75%. While at the time the issuance looked pricey, the bank has since been downgraded by several credit agencies and the bond is currently trading at a 12.5% yield.

In addition, at its last financial results, the bank had CHF44.2 billion of “gone concern capital”, which is additional capital required by the Swiss regulator to absorb losses without triggering a bankruptcy.

“We would need to burn through CHF97 billion of capital before anything happens to clients or employees,” said a Credit Suisse executive, toting up the CET1, AT1 and gone concern capital. “UBS burnt through billions in the financial crisis and got bailed out. 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 the German bank would have to skip some coupon payments on its capital bonds drove sharp moves in the CDS market.

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

“The market appears to be pricing in a highly dilutive capital raise. We do not think this is a foregone conclusion, so would argue Credit Suisse is a buy for the brave at these levels.”

When it comes to the bank’s liquidity levels, Credit Suisse has a liquidity coverage ratio of 191%, which is significantly higher than most of its peers. The ratio is a reflection of the amount of highly liquid financial assets the bank holds that can be used to meet short-term obligations.

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

By the end of Monday, the bank’s shareholders appeared calmed by the reassuring messages sent by analysts, even if there were also increasingly loud calls for the unveiling of the new strategic plan to be brought forward. At the close of the market in Zurich, Credit Suisse shares had recovered to roughly where they had started the day at CHF4.

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

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