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.
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