Credit Suisse capital gap conundrum draws analyst answers

As Credit Suisse (CSGN.S) finalises a much-anticipated restructuring, analysts are crunching the numbers on how much capital the bank may need and suggesting how best to plug that gap.

Some say Switzerland’s second-largest bank could be left with a shortfall of as much as 9 billion Swiss francs ($9 billion) in the coming years, which could mean a significant retrenchment from capital-intensive investment banking.

Credit Suisse is attempting to overhaul its business to restore profitability after a series of scandals and setbacks, including a more than $5 billion loss from the collapse of Archegos last year.

The bank is working on asset sales and considering measures to scale back into a “capital-light, advisory-led” business, with a greater focus on managing money for the rich.

“The market wants to see deep cuts made in investment banking so the bank is no longer so dependent on this risky business,” Andreas Thomae at asset manager Deka Investment said, adding: “Good capitalisation is critical”.

Deka Investment declined to say if it was a shareholder.

A spokesperson for Credit Suisse, which will unveil its strategic review alongside its results on Oct. 27, said it would be premature to comment on any outcome before then.

Goldman Sachs analysts said they expect Credit Suisse to have a total capital shortfall of 4 to 8 billion Swiss francs in 2024 in the face of “headwinds” such as weak markets and an investment bank they say lacks scale. They see the bank selling off some of their assets, such as securitised products, to alleviate some of the pressure on capital.

Analysts at Jefferies, meanwhile, estimate that Credit Suisse will need to build 9 billion Swiss francs of capital in the next two to three years, citing its weak profitability, as well as restructuring and litigation costs.

Jefferies analysts put the more immediate capital need at closer to 4 to 6 billion Swiss francs and expect Credit Suisse to prioritize asset disposals, also highlighting securitised products, as well as potentially a rights issue to fulfil this.

They also urged a restructuring of its investment bank, saying that it lags rivals and suggest the Swiss bank tighten the focus of its investment banking business, including on work where it complements Credit Suisse’s wealth management arm.

Analysts at JPMorgan see the probability of needing to raise capital from investors as having increased because of recent speculation around counterparty concerns, but they do not see it as Credit Suisse’s only option, they said in a note last week.

“CSG management should look at every option available to avoid a significantly dilutive capital increase – we do not see a capital increase as a given outcome,” the JPMorgan note said.

Credit Suisse shares have plunged almost 50% since the start of the year, trimming its market value to 11.88 billion francs.

In an effort to underline its financial strength in the face of sharp falls in its shares and bonds, Credit Suisse last week said it would buy back up to 3 billion Swiss francs of debt, hoping to reassure investors concerned about the revamp and its cost.

Credit Suisse’s five-year credit default swaps, a key risk benchmark, were indicated as high as 363 basis points on Wednesday, data from S&P Global Market Intelligence shows.

At 331 bps on Friday, the levels indicated remain well above the 57 bps at the start of 2022, in a sign of increased investor nervousness.

“Credit Suisse is facing the biggest upheaval the bank has ever seen,” Thomae from Deka Investment said. ($1 = 1.0056 Swiss francs)