JPMorgan's guide to Credit Suisse's 10 biggest threats now
Credit Suisse has been having a 'tough week.' Things for the Swiss bank are looking up following today's $54bn bailout from the Swiss National Bank, but this is merely the start of what's likely to be a long road to recovery.
A research note issued yesterday by Kian Abouhossein and JPMorgan's team of European banking analysts helpfully outlined all that might go wrong in the recuperation period. They are as follows:
1. The news cycle’s “impact on franchise”
Journalists are not writing nice things about Credit Suisse. JPMorgan's analysts said "negative newsflow" could take a further toll on the franchise.
Similarly, JPMorgan's analysts say negative newsflow could continue to impact credit spreads at Credit Suisse, that net new money may be wary, and that funding costs could rise (although presumably not in the short term, thanks to the SNB).
2. Rocky markets
Journalists writing bad things aren't the only issue. JPMorgan's analysts say there's also: “The performance of the capital markets, impacting both the investment banking capital markets business and the performance of Credit Suisse’s assets under management.”
3. Wealth management doesn't work out
If new private banking money doesn't flow in, Credit Suisse will be impacted. “The recovery in Net new money, transaction Revenues that we are assuming in 2023 in Wealth Management and Swiss Bank may or may not materialize,” says JPMorgan.
4. The overall economy
“Asset allocation mix in private banking is sensitive to macro environment; hence, changes in the macro environment drive gross margins and earnings.”
Similarly, the analysts note that poor fundamentals could have an impact on the credit book. “Credit gearing in the FICC business and leveraged finance exposure present downside risk in a challenging economic environment, while a benign Credit environment provides upside risk.”
5. Legal risk
Credit Suisse was fined €238m in a French money laundering case last year plus $2.6bn for helping US citizens evade taxes. “Legal risk arising in particular from cross-border Wealth Management-related issues as well as recent supply chain finance fund issues could impact capital and higher-than-expected fines provide downside risk and vice versa,” say JPMorgan's analysts.
6. The Asian focus
“Asia Pacific gearing of CSG could impact both IB and Private Banking business performance with declining activity levels implying downside risk to earnings and vice versa.”
7. Currency changes
“Swiss franc strengthening especially against USD and also EUR presents downside risk to earnings and vice versa.”
8. The new strategy
“Progress on execution on the strategy update presented in October 2022, present both upside and downside risks.”
9. CS First Boston’s spinoff
“Continued progress on the IB strategic review including SPG sale, CSFB business development and delivery on new cost savings plan is key for the share price performance.
10. Questions around financial transparency
Credit Suisse has already been found to have "material weaknesses" in its financial reporting. JPMorgan's analys say these aren't the only issue. - “We currently have limited details on P&L metrics for some of the businesses e.g. SPG and CSFB and hence our forecasts are based on our assumptions around these P&L metrics which may vary materially from actual details when provided by CSG (likely in 2023).”
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