Banking

Stock Spotlight: Can Credit Suisse sail through scandal?

Meanwhile, Credit Suisse’s share price has continued to fall, while the firm reported a pre-tax loss of $1.7bn for the first half of this year.

How has the business managed to end up in such a dire position, and can it make it through this rough period?

Scandal

“[Credit Suisse] has managed to be front and centre in almost every corporate mishap or scandal of the last decade,” said Toby Clothier, head of global thematic and strategy team at Mirabaud Equity Research.

The bank has come to be defined by scandal in the eyes of many, as Clothier noted: “Wikipedia lists 14 specific controversies resulting in actions against the company between 2007 and 2022.”

Some major scandals include the recent Archegos Capital Management incident, which has led to a major scaling back of their prime broking business, as well as the firm’s heavy involvement in Greensill. Clothier said these were some “of maybe a dozen proverbial banana skins in the last decade”.

“The scandals are the core driver of the share price development,” agreed Niklas Kammer, equity analyst at Morningstar. He compared Credit Suisse’s shares with UBS’s, noting that the major points of divergence between the two banks could be attributed to the impact of scandals.

UBS has consistently performed above Credit Suisse in recent years, with share prices remaining mostly flat in both the last one and five years, compared to Credit Suisse’s 47% and 72% drop in the same time periods.

However, Kammer noted: “Over the past six months, UBS has lost about 18% of its valuation as well.

“So there is a market-wide decline in valuations that is hitting the Swiss banks.”

He explained the reasons for the fall: “Lower client activity, particularly in Asia, lower equity valuations depressing AUMs and therefore fees generated on these AUMs, and their respective investment banking set up being less suited to benefit from the current volatile environment”.

Results and reforms

Will Howlett, equity research analyst at Quilter Cheviot, said: “Credit Suisse’s most recent results were weak with the bank reporting another pre-tax loss as a result of elevated litigation provisions and losses in the investment bank even on an adjusted basis.”

Clothier added that this poor performance, while other banks have performed comparatively well in recent years, raises concerns of how it would fare in “a less benign or risk off environment”.

“In the event of a European recession, we worry that losses will increase further. This in turn makes hiring more difficult and so a negative spiral can potentially set in,” he added.

As a result, the bank plans to embark on major reforms, with the hire of new CEO Ulrich Koerner and plans of restructuring.

While Kammer said he would have to wait for the exact details of the new strategy, he said he did not “expect anything groundbreaking”.

He described the firm’s plan to refocus its business towards its wealth and asset management and its universal bank in Switzerland while scaling down its investment bank as “obvious”, adding that the firm has “some very strong franchises” meaning it “does not need to reinvent the wheel”.

However, he warned “it might still get worse before it gets better”.

“The new CEO will be interested to clean the house before his new strategy gets going. The group needs to have a clear cut, because any further large litigation issues coming to light or other results of poor risk and compliance practices will set the bank back even further.”

Credit Suisse has also already been through multiple rounds of restructuring and leadership changes, leading to further reputational damage, Howlett added.

Clothier noted that in the last 25 years Credit Suisse has announced eight restructuring plans and seen seven CEOs, compared to JP Morgan’s two CEOs in the same time period.

Going forward

Kammer said: “Being viewed as stable and secure is the bread and butter an asset and wealth manager such as Credit Suisse lives off.”

Last week, Fitch Ratings downgraded Credit Suisse’s rating and kept a negative outlook for the bank, joining Moody’s, which earlier this month also downgraded the bank.

Kammer continued: “We think the bank will survive the ratings downgrade from a fundamentals basis, but it needs to be addressed by management quickly to avoid long-term reputational damages.

“Other European banks have shown us in the past how difficult it can be to change and improve your risk and compliance. Stating that every employee is now a risk manager is fine – it is the first step of openly addressing the shortcomings – but the follow-through is much harder. Changing a risk and compliance attitude takes a lot of effort.”

Looking to the future, Clothier said he could understand why several value investors have taken stakes in Credit Suisse as there is “clearly value somewhere in the stock, trading at just a third of book value”.

He added: “The million- or billion-dollar question is how to unlock it and until somebody can present a tangible path to this along with a sustainably profitable business model and an understandable strategy, we suspect the stock will continue to languish.”

Quilter Cheviot’s Howlett said: “The shares themselves trade at a sharp discount to book value but reflecting weak profitability, an elevated cost of equity given governance issues and limited capital flexibility.” 

However, Kammer argued that there was a possibility for Credit Suisse’s outlook to be “very positive” if the group refocuses and addresses the underlying issues plaguing it. Nevertheless, “the undertaking that Credit Suisse faces is a long, hard, and painful road, especially for shareholders”, he concluded.

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