Johann Scholtz, CFA, is an equity analyst for Morningstar Holland BV, a wholly owned subsidiary of Morningstar, Inc. He covers European banks.
The CHF 50 billion liquidity injection from the Swiss central bank announced this morning could buy Credit Suisse CS some precious time to execute a more radical restructuring than it previously envisaged. It has become clear that the current restructuring plan does not go far enough to address the concerns of funders, clients and shareholders.
We believe that the key to restoring confidence and ensuring its viability is for Credit Suisse to close down its loss-making securities trading business in an orderly fashion. While we believe the liquidity injection is positive, the situation remains highly fluid, and we keep our fair value estimate and moat rating under review.
The confirmation from Credit Suisse in the announcement that its high-quality liquid assets bond portfolio is fully hedged against interest-rate risk is welcome. This should reduce concerns around potential mark-to-market losses of held-to-maturity bonds. Credit Suisse also reiterated that its lending book remains healthy, with 90% of it comprising secured loans.
Credit Suisse’s Profitability Problem
Credit Suisse, however, has a profitability problem, not an asset quality problem. Its current restructuring plan is too complex and does not provide enough detail on the future of the investment banking business. Investment banking has been the source of many of Credit Suisse’s past woes. Under the current restructuring plan, Credit Suisse will retain the perennially unprofitable securities trading business.
The carve-out of some of the more profitable parts of the investment banking businesses into a “new” CS First Boston vehicle seems like a cosmetic change, with only vague indications of a potential IPO in the future. We believe a more radical separation of investment banking activities from Credit Suisse is needed to restore confidence. Credit Suisse should shut down the securities trading businesses. It should also clarify the ultimate ownership structure of CS First Boston with a clear timeline for an IPO or other disposal.
The opinions, information, data, and analyses presented herein do not constitute investment advice; are provided as of the date written; and are subject to change without notice. Every effort has been made to ensure the accuracy of the information provided, but Morningstar makes no warranty, express or implied regarding such information. The information presented herein will be deemed to be superseded by any subsequent versions of this document. Except as otherwise required by law, Morningstar, Inc or its subsidiaries shall not be responsible for any trading decisions, damages or losses resulting from, or related to, the information, data, analyses or opinions or their use. Past performance is not a guide to future returns. The value of investments may go down as well as up and an investor may not get back the amount invested. Reference to any specific security is not a recommendation to buy or sell that security. It is important to note that investments in securities involve risk, including as a result of market and general economic conditions, and will not always be profitable. Indexes are unmanaged and not available for direct investment.
This commentary may contain certain forward-looking statements. We use words such as “expects”, “anticipates”, “believes”, “estimates”, “forecasts”, and similar expressions to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to differ materially and/or substantially from any future results, performance or achievements expressed or implied by those projected in the forward-looking statements for any reason.
The Report and its contents are not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Morningstar or its subsidiaries or affiliates to any registration or licensing requirements in such jurisdiction.
This information has been accurately reproduced, as received from Morningstar, Inc. No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.
The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.
If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. Any decision to invest should always be based upon the details contained in the Prospectus and Key Information Document (KID), which may be obtained from MeDirect Bank (Malta) plc.