After Moody’s and S&P lowered the company’s credit rating on Wednesday, Goldman Sachs reduced Credit Suisse’s stock to “sell,” which caused a decline in its share price.
The shares of the troubled Swiss lender were down slightly by early afternoon trade in London, having recovered some of their earlier losses, and are still down more than 42 percent for the year. Ulrich Koerner, the new CEO who took over after Thomas Gottstein resigned last week, is now in charge of the company.
After posting a second-quarter net loss of 1.593 billion Swiss francs ($1.66 billion), significantly less than expected due to weak performance from the investment bank and rising litigation provisions, the bank announced a fresh strategic review.
Due to company-specific events and revenue-related challenges faced by the entire industry, Credit Suisse has underperformed the rest of the sector by 59 percent since the start of 2021, according to a report by Goldman Sachs on Tuesday.
The Wall Street titan anticipated a stop in near-term wealth management performance due to outflows and muted market performance due to this underperformance continuing over the next 12 months as investment bank returns stay constrained through 2024.
“On capital, while we foresee no near-term shortfall, organic capital generation is below peers and RWA (risk-weighted assets), inflation plus litigation plus restructuring has the potential to further deplete capital to a relatively low buffer vs regulatory minimums,” in a statement sent out on Tuesday, executive director Chris Hallam and his staff stated.
Credit Suisse is currently valued roughly in line with the sector, despite the more positive picture Goldman sees for the European banking industry, in which higher interest rates will boost revenue and return forecasts, reinvestment in new technology will enhance returns, and excess capital can be distributed to shareholders.
“Our revised 12-month price target implies 5% upside, but in the context of c.60% upside on average across our Banks coverage, this equates to meaningful underperformance: accordingly, we downgrade the stock to Sell from Neutral,” Goldman said.
Decreases in credit scores
On Monday, Moody’s maintained a negative outlook on Credit Suisse’s credit trajectory and cut the bank’s senior unsecured debt and deposit ratings by one notch each.
“The downgrade of CS’s ratings reflects the challenges the group is facing in successfully executing on its previously announced repositioning of its investment bank in the more difficult macroeconomic and market environment as well as uncertainty as to the business and financial implications of the group’s plans to take further steps to achieve a more stable, capital light and better aligned investment banking business,” Moody’s said.
Additionally, the rating company cited that, “the crystallisation of large financial losses during H1 2022, resulting in stress on the bank’s financial profile and potential delays in technology investments, and in the transformation of the business and an expectation of continued weak performance in 2022.”
Additionally, Moody’s highlighted data showing that Credit Suisse’s market share is declining and that its investment bank has suffered from “franchise impairment” as a result of the deleveraging of its capital-intensive operations and exit from the prime brokerage industry.
According to Moody’s, the group’s continuing risk and compliance operations revamp is “lengthy and resource-consuming,” and stabilising the organisation under new management and a new senior executive team would take some time.
“These factors are partially mitigated by the firm’s solid – although decreasing – capitalisation and strong liquidity and funding profiles,” it added.
Axel Lehmann, chairman of Credit Suisse, stated last week on CNBC that the new strategic review will aim to speed up restructuring efforts.
In addition to strengthening the group’s wealth management, Swiss banking, and asset management activities and transforming the investment bank into a capital-light, advisory-led banking firm with a stronger market focus, the review will aim to significantly lower the group’s cost base.
However, Moody’s downgraded Credit Suisse’s score for corporate conduct by one notch due to “governance deficiencies and top management instability,” as well as doubt over the bank’s “ability to successfully execute” on the “as yet to be defined” restructuring strategy.
S&P Global Ratings changed the outlook for Credit Suisse to negative on Monday due to sustained dismal profitability over the medium term, rising risks to the stability of the bank’s brand, uncertainty surrounding the replacement of top executives, and a “lack of a clear strategy.”
“The negative outlook reflects the setbacks Credit Suisse could face in redesigning its strategy, with new management at the helm, in order to transform the bank in an increasingly difficult operating environment,” S&P said.