Credit Suisse: I Am Selling (Rating Downgrade)

Dan Kitwood

I was a staunch carnivore erstwhile it came to Credit Suisse Group AG (NYSE:CS) successful nan aftermath of nan Archegoes Capital debacle and erstwhile nan banal was trading astatine complete $10. I suspected location would beryllium a time to go much bullish, aft each CS had an enviable position and awesome estimation successful wealthiness management.

I yet turned bullish erstwhile nan banal was trading astir $3 and alteration and it seemed for illustration astir of nan slope news including nan $4 cardinal superior raise was factored into nan banal price.

The thesis was rather straightforward. CS was de-emphasizing nan finance slope and afloat retreating to its halfway spot of wealthiness guidance complemented by a beardown marque name. Wealth guidance businesses thin to beryllium weighted rather generously by nan market. For example, Morgan Stanley (MS) is weighted astatine 2x tangible book, and moreover UBS (UBS) is weighted astatine a premium to tangible book value. CS was trading astatine ~0.25x tangible book, and if it were capable to stabilize nan outflows from clients, nan early seemed rather bright. I was very encouraged by comments provided by nan Chairman astatine nan clip that look to bespeak that outflows had stabilized, and I figured that was a bully clip to commencement a position.

At nan time, I outlined nan rationale successful this article:

The newsflow suggesting that worldly outflows are happening successful Q4 was very troubling, if this was to continue, past nan WM would perchance go materially impaired. It besides appears that nan outflows besides led to nan liquidity astatine immoderate of its entities dropping beneath regulatory requirements. The outflows would besides deed gross and nan WM business is predominantly a fixed-cost business. The cardinal logic appears to beryllium nan relentless societal media rumor mill relating to its financial stability. Many HNW investors were spooked and simply did not want to return a chance this is going to manifest successful a European Lehman Brothers moment.

Fortunately, successful caller days nan newsflow improved significantly. On Thursday, Chairman Axel Lehmann told nan Financial Times that customer outflows person partially reversed and very fewer clients person near nan slope entirely.

This is an important distinction. The truth that clients did not time off nan slope suggests this is impermanent and customer flows tin return very quickly. It is important to understand that erstwhile a customer closes nan accounts and leaves nan slope - re-onboarding this customer is simply a prolonged (potentially respective months) and costly exercise. Clients who time off (i.e. adjacent their accounts) are improbable to return.

It appears that clients whitethorn person only temporarily diversified their costs distant owed to (unjustified) concerns relating to CS's financial stability.

Based connected nan Q4 net telephone disclosure, it appears that I was perchance misled by nan Chairman:

As Ulrich mentioned, much than two-thirds of nan flows occurred successful October and much than 85% successful October and November. And successful our disclosures, we were beautiful fulsome successful October astir immoderate impermanent breaches that we had.

So it appears that outflows did not extremity and reverse successful December arsenic communicated by nan Chairman connected nan 9th and 10th of December to the Financial Times and Bloomberg, respectively.

It appears that I was basing my bullish telephone connected perchance incorrect accusation and, arsenic per nan exclusive Reuters report, it seems that nan Swiss financial regulator is reviewing these comments by Chairman Axel Lehmann which will perchance move into an charismatic investigation.

My takeaway

There could beryllium respective possibilities that person played out:

1. Perhaps nan Chairman was not decently briefed erstwhile he made these statements astir outflows stability
2. Outflows whitethorn person temporarily stabilized successful early December but past outflows intensified later connected successful nan month
3. The Chair glossed complete nan facts aliases did not uncover nan complete image that became evident successful nan net call

It is besides important to statement that these comments were made astatine nan clip erstwhile nan institution was raising $4 cardinal from investors. This is somewhat troubling to me. I presume nan Swiss regulator enquiry will find what really transpired and whether an charismatic investigation will beryllium required. In immoderate case, each of these permutations are bad news for nan stock, arsenic intelligibly nan outflows person continued.

Management now has an further imaginable credibility and spot rumor pinch nan market, and frankincense I americium not amazed nan banal is down difficult this morning.

The consequence is that pinch nan nonaccomplishment of spot by marketplace participants, nan business whitethorn spell into a slow decease spiral, backing costs could spike again, and nan institution whitethorn proceed to bleed assets nether guidance ("AUM") and suffer cardinal rainmakers. There is simply a anticipation that a caller guidance squad will beryllium needed arsenic well, arsenic nan existent squad whitethorn not past nan turmoil. Banking is each astir retaining nan spot of marketplace participants and regulators, and that is difficult and takes a agelong clip to regain that trust.

Final thoughts

I americium trading Credit Suisse Group AG banal arsenic I person wholly mislaid spot successful nan guidance team. The slope whitethorn besides now beryllium nether regulatory scrutiny, it is not investible now successful my view.

I fishy this will now beryllium a overmuch longer and prolonged turnaround communicative and nan likelihood of occurrence person declined materially.

I do admit that Credit Suisse Group AG banal is trading astatine distressed valuations (less than 0.2x tangible book), truthful immoderate bully news and nan banal will apt melt up. Other outcomes that are imaginable that whitethorn beryllium bullish would beryllium M&A (i.e., personification will bargain this bank) aliases definitive support from Middle Eastern investors (e.g., contributing to AUM).

Having said that, nan risk/reward for Credit Suisse Group AG is not compelling to maine astatine this juncture. Absent an M&A transaction aliases a miracle, I expect Credit Suisse to slow bleed assets and group and yet for nan business to shrink.

Thankfully, my disciplined consequence guidance has worked out, arsenic my Credit Suisse Group AG position was a comparatively mini one. I will return a mini nonaccomplishment and move on.

Editor's Note: This article discusses 1 aliases much securities that do not waste and acquisition connected a awesome U.S. exchange. Please beryllium alert of nan risks associated pinch these stocks.

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