Credit Suisse A ‘Buy For The Brave’ With Significant Risk, Says Citi

The current levels of Credit Suisse Group AG stock make it a “buy for the brave”, but with significant risk attached to it, according to Citigroup.

'This Is Not 2008', analysts at Citigroup in a report, saying that the return on tangible equity is no longer the question with the Credit Suisse stock.

Rather, the market appears to be pricing in a highly dilutive capital raise. Since this is not a foregone conclusion, the scrip is “a buy for the brave at these levels”, according to Citi analysts.

Such a move will have come with risks though, the analysts said. “…headline news flow is likely to remain negative and we do see significant execution risk in any new strategic plan.”

Citi is one of the four research firms that maintain a 'buy' rating on Credit Suisse. 15 recommend 'hold', while nine have a 'sell' rating.

According to Citigroup analysts, Credit Suisse still has a high common equity tier 1 ratio compared to peers as well as excess capital, best-in-class liquidity coverage ratio, and high-quality liquid assets worth 235 billion Swiss francs (around Rs 19,420 crore), indicating a healthy liquid position.

“Rather than liquidity concerns, we see the current move in spreads as an inconvenience for funding costs and for private banking NMM (net new money), where there is a risk of further outflows on the negative media headlines.”

The investment bank can be restructured with an exit from securitised products being plausible without the need for a capital raise, it said.

“However, a broader exit (e.g., from leveraged finance and credit too) could prove more costly and push the bank into needing more capital. The current multiple therefore constrains the new management's ability to restructure the investment bank and we fear the tail will continue to wag the dog.”

In the report, Citi analysts have given a target price of six Swiss francs (Rs 495.04) for Credit Suisse, based on a combined valuation approach.

The execution risk on a potential restructuring, with a potentially greater-than-anticipated loss of earnings and changing capital markets conditions with shifting valuations and volumes in the broader markets comprise downside risks on the stock, it said.

Conversely, lower potential earnings loss from the IB (investment banking) restructuring, delivering on the WM (wealth management) growth story, and greater rerating of both the IB and WM franchises from greater connectivity, sustainability and less volatility are upside risks to the bank, according to Citi.

The Credit Suisse stock plunged into fresh market turmoil as a memo from its Chief Executive Ulrich Koerner to assuage worries of employees and investors backfired.

The letter, which was meant to establish the bank's liquidity and capital strength, instead drew attention to recent upheaval in the firm's stock price and credit spreads.

Investors were quick to exit the stock, which recorded a new record low earlier today.