The big news out of the financial sector over the weekend concerned investment bank Credit Suisse (CS) and its financial health. Shares of the bank dipped to a new all-time low Monday morning before rebounding slightly, but many investors and analysts are deeply concerned about the Switzerland-based bank's future.
Here's a rundown of what happened, why investors are so concerned, and whether Credit Suisse is a bargain stock to consider for your portfolio.
Is Credit Suisse in trouble?
The short answer is that we don't know for sure. The Financial Times reported that Credit Suisse was in discussions with investors to reassure them of the bank's financial health. It was also reported that CEO Ulrich Korner sent a memo indicating that the bank is looking to raise capital. And without getting too deep into a discussion of derivatives, the bank's credit default swaps -- basically insurance against the bank defaulting on its debt -- saw costs rise sharply, essentially indicating that investor confidence in the bank's financial health was eroding.
Now, the bank's management denies any major problems. In a note to CNBC, Korner spoke of the bank's strong capital base and liquidity position. And separately, he denied reports that the bank needs to raise capital but did confirm that Credit Suisse is completing a strategic review. In fact, in his memo to staff, Korner said the bank was at a "critical moment" and would present its strategy update plans on Oct. 27. Analysts have speculated that the bank could sell some of its assets, and could potentially exit some of its markets, including the United States.
Why is the market worried?
The 2007-2009 financial crisis still leaps to investors' minds when markets get turbulent. And the collapse of a major financial institution would trigger a wave of panic in the markets that another crisis is beginning.
Credit Suisse is a massive investment bank, with about $1.5 trillion under management and operations all over the world. To put this into perspective, Lehman Brothers -- whose 2008 bankruptcy was a key event in the financial crisis -- had less than $250 billion in assets under management (AUM) at the time of its collapse.
Still, analysts generally don't see a worst-case scenario playing out here. A report by Citigroup analysts called the situation "night and day from 2007." JPMorgan Chase called Credit Suisse's capital position "healthy."
Is Credit Suisse stock cheap now?
Credit Suisse is down by roughly 60% over the past year, trading at an all-time low. Shares of the investment bank trade for just 21% of book value (that's not a typo). So, it may seem like a good time to buy the stock at a bargain.
However, keep in mind that there are significant risks to doing so. As mentioned, some experts think there's a serious chance that Credit Suisse could collapse. And even though many think there's a very low probability of that happening, there are plenty of bank stocks trading cheaply that aren't having financial problems. For example, if you're looking for an investment bank, Goldman Sachs is trading for less than its book value for the first time since the initial 2020 COVID-19 crash and is in solid financial shape.
There are other examples for sure, but the point is that it's important to be able to distinguish between stocks that are cheap and stocks that are cheap for a reason. While a full collapse seems unlikely, Credit Suisse is definitely in the latter category.
