Credit Suisse divides Wall Street as JPMorgan calls bank's capital 'healthy’ while others have doubts

Published Mon, Oct 3 20228:35 AM EDTUpdated Tue, Nov 8 20226:58 AM EST

The fast-moving situation at embattled bank Credit Suisse has divided Wall Street's analyst community. Based on the company's financials at the end of the second quarter, both its capital levels and liquidity position look "healthy," according to JPMorgan Chase European banking analyst Kian Abouhossein. The bank's common equity Tier 1 capital, a key measure tied to the bank's ability to absorb financial shocks, was 13.5% at mid-year, which is "well within" the bank's stated range, Abouhossein said Monday in a research note. Still, as shares of the Zurich-based bank fall and spreads on its credit default swaps widen, other analysts believe Credit Suisse needs to address possible capital shortfalls. "The debate over whether additional equity capital is needed at a group level has been largely settled, we think, by the rise in debt costs: an equity raise now looks a core part of the restructuring," said Alastair Ryan, the Bank of America Securities research analyst, in a note Monday. That's because the widening spreads on swaps, which provide investors protection against default, can lead to "significant" pressure on earnings and could make their debt more expensive as it's perceived to be risky, according to Ryan. Credit Suisse has said that it will disclose a sweeping restructuring plan on Oct. 27; the bank may sell or shutter parts of its global investment banking franchise as part of that plan, according to news reports. That would relieve some of the pressure on the bank if it exits capital-intensive Wall Street activities, Ryan said. That has the "potential in turn to improve debt funding costs," he said. But asset sales are only a "partial solution" because the bank would be a forced seller in a down market, Jefferies analysts led by Flora Bocahut wrote Monday. The sales would also cut future earnings and cost 1.5 billion to 2.5 billion Swiss francs in restructuring costs, the analyst said. "We think asset sales alone are unlikely to be the solution to the potential capital shortfall problem, but could be a first step and buy time until shares recover," Bocahut wrote. On Friday, KBW analysts led by Thomas Hallett wrote that Credit Suisse needs around 6 billion Swiss francs to support its restructuring plan and "protect from the unknown." While asset sales will help, about 4 billion Swiss francs of the effort will likely come by selling shares, they said. As for the risks of financial contagion from Credit Suisse to other global banks — a hallmark of the 2008 financial crisis — Citigroup 's Keith Horowitz expressed confidence in the capital levels of big American banks. He called the group "very attractive" at current valuations. "We understand the nature of the concerns, but the current situation is night and day from 2007 as the balance sheets are fundamentally different in terms of capital and liquidity, and we struggle to see something systemic," Horowitz wrote in a note published Sunday. Still, a lot can happen in the weeks until Credit Suisse unveils its restructuring plan. The title of the Bank of America analyst note says it all: "October's a long month."