Credit Suisse’s Options Worsen As Markets Mayhem Takes A Toll

(Bloomberg) -- Dixit Joshi won't forget his first day as Credit Suisse Group AG's chief financial officer in a hurry. And yet the experience won't have been entirely unfamiliar for the former Deutsche Bank AG high flier.

Shares in the Swiss banking giant plummeted 12% to an all-time low on Monday after a weekend of fevered Twitter speculation about its financial health, before they regained almost all of the losses later in the day. 

The wild gyrations show the difficulty for Credit Suisse in managing the febrile confidence of investors as it rushes to devise a repair plan for its investment bank, which has been on the ropes since suffering massive losses last year from backing Archegos Capital Management. The price investors have to pay to insure the bank's debt hit record levels, leading some to harken back to the fear-driven days of 2008.

In reality, several analysts say the better comparison is to Deutsche Bank in 2016 and 2017 -- a time when Joshi helped devise its own crisis response to a surge in the German bank's credit-default swaps. Morgan Stanley went through similar in 2011. Both survived the ordeal.

“This is not 2008,” Citigroup Inc.'s Andrew Coombs said.

Nevertheless, Monday's initially panicked stock-market reaction to Credit Suisse's rising CDS costs points to a worsening set of options available to the Swiss firm ahead of its emergency strategy review on Oct. 27, which is expected to include a large-scale investment banking retreat. 

Investors are worried about how the bank will cover such a plan's cost -- which many analysts have pegged at $4 billion -- and what that would mean for its core capital ratio of 13.5%, especially during a period when the investment bank has been suffering heavy losses. With its shares on the floor after dropping more than 95% from their peak, the lender hopes to raise cash through disposals rather than a highly dilutive rights issue of the type Deutsche Bank ended up doing. 

“If one of the options includes a capital raise, it's always going to be tough for a stock to steady when the amount of potential issuance and dilution is unknown,” said Alison Williams, a banking analyst at Bloomberg Intelligence. “Tough markets increase the impatience.”

A sale of Credit Suisse's structured-products group, which trades securitized debt, has attracted interest from potential buyers including BNP Paribas SA and Apollo Global Management Inc., but there's skepticism about how easy it will be to sell such assets -- or secure good prices -- when rising interest rates have put them under pressure. The broader backdrop for investment banking is hardly any rosier: BI estimates that fees in the US may have dropped by 50% or more in the third quarter. 

“Had they started to restructure a year or two ago then they would have an easier time selling as there was more demand for risky assets,” said Andreas Venditti, a banks analyst at Vontobel. The firm has been doubly unlucky because it's skewed toward investment bank activities that are struggling right now, including its leveraged-loans unit. 

According to Venditti, the problem for Chief Executive Officer Ulrich Koerner and Chairman Axel Lehmann -- the Swiss duo charged with designing a workable restructuring plan -- is that fractious shareholders will react badly if the pair don't take radical action to shrink the investment bank, after previous regimes ducked the hard choices. That may leave them little alternative other than to embark on an expensive restructuring.

A sale of the asset-management unit -- which suffered its own reputational hit from the implosion of Greensill Capital -- is another potential money-spinner. Or Koerner and Lehmann could dust off the idea of former CEO Tidjane Thiam and pursue an initial public offering of the domestic Swiss bank, which has held up relatively well as other parts of Credit Suisse have been engulfed by scandal and markets mayhem. That would, however, be tricky in a rough moment for IPOs. 

One option would be bringing forward the publication of the strategy review, rather than enduring another three weeks of stock-market turmoil, although the management team will be wary of yet another botched C-suite attempt to cauterize the wounds. JPMorgan analyst Kian Abouhossein suggested the bank could bring forward an announcement on its third-quarter capital position, to back up the weekend message to investors that its balance sheet remains solid.

The experience of Deutsche Bank and Morgan Stanley might be instructive. The German lender's 2016 crisis was sparked in part by the US Justice Department requesting $14 billion to settle an investigation into residential mortgage-backed securities. Even after the bank ultimately reached a deal for about half that amount, the concerns weren't allayed until it raised 8 billion euros ($7.85 billion) of fresh capital the next year.

Morgan Stanley faced its own surge in credit spreads from market rumors in 2011, when persistent chatter that it was heavily exposed to shaky European debt weighed on its stock and bonds. The firm's biggest shareholder gave it public backing, but it took months for the price of the default swaps to fall as the feared losses never materialized.

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