Credit Suisse (CS +0.00%) has been in trouble all year long, with its stock now trading below $4.60 per share, near all-time lows. The Swiss bank also now trades around just 25% of its tangible book value, or net worth.
In recent years, Credit Suisse has suffered a number of scandals, including having lots of exposure to funds like Archegos Capital and Greensill Capital, both of which collapsed and have led to billions of dollars in losses for the bank.
Credit Suisse now faces the tough task of transforming its operations and trying to get back into the good graces of its shareholders. While the bank is not on the brink of failure, it's definitely in trouble.
A costly restructuring
Credit Suisse has shown several big areas of weakness that have rightfully made investors very nervous about its future.
Image source: Getty Images.
It provided prime brokerage services to Archegos Capital, from a unit that the bank has now winded down. And it had exposure to Greensill Capital in its asset management unit, as well as loans made to the company. The bank took a $5.5 billion loss from Archegos and a roughly $1.7 billion loss from Greensill. Now the question is what other surprises might be brewing at a bank that clearly needs to fix its culture and risk-management policies and practices.
Multiple reports have already surfaced that the bank is planning to overhaul its investment banking operations, and could even split the bank into separate units, including one that would be used to offload and unwind riskier assets.
Capital shortfall
All of this might be costly, and now analysts think Credit Suisse could face a capital shortfall of as much as $8 billion by 2024. This does not mean that the bank needs $8 billion to avoid a colossal bank failure, but rather that it could fall below management's internal capital targets, which consist of regulatory capital the bank is required to hold plus management's internal buffer above that.
To stay in good standing with regulators, banks need to stay above their required regulatory capital ratios. Otherwise, a bank could be limited in what it can pay out to shareholders through dividends and share repurchases, as well as other kinds of operational moves it can make, such as acquisitions or expansion.
NYSE: CS
Key Data Points
Banks must maintain a certain amount of core capital as a percentage of their risk-weighted assets such as loans in a ratio known as the common equity tier 1 (CET1) capital ratio. At the end of the second quarter, Credit Suisse actually had an extremely strong CET1 ratio of 13.5%, and its regulatory requirement is only 10%.
If the bank wasn't facing all of these scandals and a massive restructuring effort, investors would say that Credit Suisse is extremely well capitalized.
The problem is the bank is going to have to use a lot of capital to overhaul its operations and could potentially have to deal with more losses or litigation related to its past scandals or other riskier assets. The bank also isn't generating a ton of capital right now, having reported net losses in each of its last two quarters.
Why is Credit Suisse in trouble?
While it's not on the brink of failure, Credit Suisse still needs to come up with the capital to do all of its necessary restructuring and get safely over its regulatory capital targets. Right now, it doesn't have a lot of good options.
The bank could try to raise capital, but that would be incredibly dilutive at its current beaten-down valuation. Another option is to sell some of its stronger businesses, but it's going to need those later to generate profits. Plus, with valuations so low, it might be difficult to fetch the price it's looking for.
Bloomberg also reported that the bank might try to find an outside investor to acquire a stake in any kind of investment banking spinoff and put cash into the business.
None of these options is terribly attractive, and that makes it harder for Credit Suisse to make a successful transformation. The resulting loss of investor confidence could explain why Credit Suisse's credit default swaps widened recently. The bank is expected to announce its restructuring plans later this month. Until more is known, I am staying away from the stock.
