There are no two ways about it -- Credit Suisse Group AG (CS) is a disaster. From 2021's implosion of hedge fund Archegos Capital to recently announced fundraising at less-than-ideal terms (not to mention a few other gaffes in the meantime), it's no wonder Credit Suisse shares are now priced at a third of their pre-pandemic peak from early 2020. Indeed, the stock's lost more than 90% of its value since 2007's high, largely due to the same lack of discipline that's been so pronounced just within the past few months.
But as the old adage goes, nothing lasts forever. Enough shareholders and creditors finally had enough to jolt the Zurich-based outfit into real change. The stock may be near a major bottom, if it hasn't hit one already.
Meet the (almost) new and improved Credit Suisse
On the off chance you're reading this and don't already know, financial firm Credit Suisse is on the ropes. Its oversized stake in now-failed hedge fund Archegos is arguably its biggest recent blunder, leading to $5.5 billion in booked losses in early 2021.
The blunder, however, is merely a proxy for the bank's other poor decision-making of late. Bribes, the backing of loans riskier than Credit Suisse was led to believe, and a lack of client oversight that implicated the bank as a drug-money launderer are some of the other missteps it's made just within the past few years.
Now, with little other choice, the company is finally making necessary changes.
One of those changes is the impending sale of much of its securitized products business to private equity outfit Apollo Global Management. Credit Suisse says this move will allow it to better focus on its core banking businesses.
The move is also just a sampling of what's to come. In October, the company unveiled plans to drastically reduce its exposure to such risk-weighted assets, and ramp up its exposure to markets-related operations. Credit Suisse says it intends to devote 80% of its capital to wealth management and investment services by 2025. In the meantime, it's creating a division tasked with accelerating the "run-down of non-strategic, low-return business and markets, to release capital."
Current CEO Ulrich Körner is the right person to lead this overhaul effort. He's something of an outsider with no particular ties to the old company or its old ways. He was only hired as the CEO of Credit Suisse's asset management arm in April of last year, taking the helm as head of the whole company in June of this year. He's part of the proverbial clean slate and highly experienced in the wealth management arena that's Credit Suisse's new priority.
A distant light at the end of the tunnel
The work's not done yet. As was noted, even by 2025, Credit Suisse still won't be entirely focused on investing and wealth management. The wind-down phase of its other ventures will also prove as expensive as it is complex. For example, while not officially a junk bond, the $5 billion raised via the sale of new debt earlier this month is costing the bank as much as 9%, nearing coupon rates that are considered high-risk "junk."
The bank's Greensill debacle isn't fully in the past either. Greensill Capital is a supply chain financier that filed for bankruptcy in 2021, largely due to unpaid loans linked to the fallout from the pandemic. Since Greensill was largely backed by Credit Suisse, its implosion took a toll on the bank's bottom line.
These outstanding loans are finally being addressed. Major Greensill and Credit Suisse borrower Liberty Steel Group just recently inked a preliminary debt-restructuring deal with debtholder Credit Suisse, as coal mining company Bluestone Resources and other borrowers did earlier this year. Given the amount of time that's passed since these loans were made and the fact that negotiations were required to settle them, however, it's not a stretch to suggest significant accommodations were made. Several Greensill investors are still mulling a lawsuit levied against Credit Suisse for its failures in the matter as well.
Data source: Thomson Reuters. Chart by author.
On balance, though, the worst of the worst is in the rearview mirror. While it's distant, there's a light at the end of the tunnel. If Credit Suisse shares behave as most stocks of mid-overhaul companies do, it should start to reflect a brighter future before that future actually materializes.
Fortune favors the bold
It's hardly a risk-free choice, to be clear. It's still only an appropriate stock pick for risk-tolerant investors willing and able to give the bank at least five years to hammer out its turnaround plans. Expect lots of volatility in the meantime.
If you can stomach such risk, Credit Suisse is a compelling prospect -- if only because nobody seems to like it now. As Warren Buffett put it, be "fearful when others are greedy, and greedy when others are fearful."
There's certainly no shortage of fear here.
