Key Takeaways
1. Investors are focusing on a potential capital increase, which could be very dilutive
2. The bank lacks a clear strategy, and all eyes are on third-quarter results, where more details on strategy are expected
Lukas Strobl: Something weird just happened with Credit Suisse. After doubts about the bank's capitalization and strategy sent its credit default swaps skyrocketing over the weekend, its stock slumped on Monday. Now, its shares are back above Friday's close, and it's time to ask: What was that all about? Here with me to talk about the state of Switzerland's second biggest lender are Elisabeth Rudman, head of European financials at DBRS Morningstar-- that's our in-house credit rating agency-- as well as Johann Scholtz, analyst for European Banking Stocks. Thanks for joining me. Let's start with the credit side of things. Elisabeth, is there really cause for concern with Credit Suisse's fundamentals?
Elisabeth Rudman: So, as a credit rating agency, yes, we do have concerns about Credit Suisse, and we have a negative trend on our rating of the bank. However, some of the more recent concerns seem to be based not upon new information. We already know that Credit Suisse has been going through a very challenging period. It's had a lot of sizable risk management failures, worse than many of its peers, and it's had a lot of management change, senior management changes. So, everyone needs to see a plan coming out from Credit Suisse, which will explain how they're going to stabilize the franchise and get the bank back on an even keel. So, those are the things that we're focusing on. The latest financial information would indicate that they have sufficient capital and liquidity at that point in time. But if they are going to – but to make the changes they need, they will possibly need more capital and clearly that is what people are focused on.
Strobl: So, there are very real challenges to address. Johann, what does this mean for shareholders of Credit Suisse?
Johann Scholtz: Yes, Lukas, I think we've clearly seen that the share price is discounting the possibility of a capital call or a rights issue. And yeah, obviously, at these depressed valuation levels such a rights issue can be very expensive and very dilutive for shareholders.
Strobl: How big of an impact could we be looking at in terms of its share price?
Scholtz: Well, yeah, I think that's the tricky one. It's the extent to – to what extent is it already being priced in and to what extent is it not being priced in? And I think what you could potentially see is Credit Suisse will really have to hit that sweet spot in terms of where it's raising enough capital to assuage concerns but not raise too much capital to actually cause further damage to the share price.
Strobl: Of course, the capital raise isn't the only thing that's expected. The bank is expected to roll out a new strategy on October 27th. What should shareholders be looking for that day?
Scholtz: Yes, I think what shareholders really want clarity about at this stage is exactly what the bank is going to look like going forward. There's a lot of speculation. Are they going to sell bits of the investment bank? Are they going to sell the whole investment bank? Are they going to sell asset managers? So, I think the first thing that needs to be addressed is shareholders need clarity in terms of what exactly is Credit Suisse going to constitute going forward. And then, I think secondly, and that's the tricky one to address, is the continued risk management failures, assets being addressed, and I think shareholders would probably not be averse to Credit Suisse taking a kitchen sinking approach and really go out there and raise provisions for all outstanding issues and try and draw a line in the sand.
Strobl: Now, is there anything that bond investors separately are looking for that Johann hasn't mentioned so far, Elisabeth?
Rudman: I think I would say, at this point, bond investors, shareholders are all looking at the same things in terms of the strategy of the bank and the announcements coming forward. We've seen banks in this situation before where they've faced a lot of market concern. Deutsche Bank a few years back was facing some similar questions. They managed to come together with a strategy which they've executed on and has improved the stability of the bank. So, I think we'll be all focusing on similar issues for Credit Suisse.
Strobl: So, clearly, the lender needs to deliver to gain back investors' trust. Thank you both for joining me today. For Morningstar, I'm Lukas Strobl.
