Credit Suisse Is in Dire Straights

  • In Business
  • 2022-10-03 17:39:44Z
  • By

Rumors have emerged that Credit Suisse (NYSE:CS) is planning to issue additional shares in an attempt to revive the bank's recent misfortunes. A capital raise would theoretically dilute Credit Suisse's investors, which has many market participants concerned.

Credit Suisse's capital raise remains just a rumor for now. However, where there's smoke, there's fire, and Credit Suisse certainly looks like a company that needs a turnaround. Here's what I expect in the coming months.

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  • CS 15-Year Financial Data

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  • Peter Lynch Chart of CS

Credit Suisse's sustained turmoil

Earlier this year, Credit Suisse named Ulrich Koerner as its new CEO, replacing Thomas Gottstein. Koerner has been tasked with cutting more than $1 billion in costs as the bank continues to sustain heavy income statement pressure amid waning market share in key segments.

Credit Suisse has agreed to reshuffle operations and form three key divisions. First, Koerner has instructed the compoany to create two segments that will likely be spun off at a later stage: namely, the advisory business and high-risk asset management. The third division will be Credit Suisse's "other business" segment, which could be divided into lending, trading and services-based activities.

Although the bank's plans might seem to promise a bright future, a mass overhaul can be costly. In addition, Credit Suisse's market positioning has been an issue for years, and some investors see the bank's latest methodology as a desperate move.

Whether Koerner will be successful in his task or not is anyone's guess. However, one thing's certain; Credit Suisse investors likely won't see much residual value attached to their investments for quite some time.

Stress test

The Basel III framework is a globally accepted stress test carried out by banks. The test weighs a bank's risk versus invested assets to paint a picture of the enterprise's allocational efficiency.

Credit Suisse's 2022 stress test results are a mixed bag. Firstly, the bank's Tier 1 Capital is well covered, meaning its equity capital investments are running efficiently.

However, Credit Suisse's Tier 2 Capital is lagging behind regulatory requirements. The bank's lagging Tier 2 Capital means the bank lacks the necessary capital to restructure successfully. Therefore, an additional capital raise makes sense given the bank's plans.

Credit Suisse Is in Dire Straights
Credit Suisse Is in Dire Straights  

Source: Credit Suisse

Concluding thoughts

Rumors that Credit Suisse might raise additional capital shouldn't be a surprise. The bank is set to undergo a severe restructuring, and its Tier 2 Capital ratio is below requirements. Therefore, Credit Suisse needs additional capital to pivot into a more cost-effective organization. A capital raise could dilute its current shareholders; however, that doesn't necessarily mean Credit Suisse can't provide long-term value to its investors.

This article first appeared on GuruFocus.


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