Credit Suisse (NYSE:CS)(GB:0QP5) stock is under pressure on concerns over its financial health. However, a closer look at its capital and liquidity position reveals that these concerns are unwarranted and the financial services giant is well capitalized compared to peers.
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Here’s What Triggered the Fear
The fear over its financial health stemmed from the fact that CS would need to raise additional capital to fund its restructuring initiatives. Further, execution risk related to its transformation plan and the continued decline in its share price added fuel to the fire.
Amid concerns, Reuters reported that the cost to insure default risk rose sharply. Per the report, Credit Suisse’s credit default swaps rose to 335 basis points.
Why Concerns are Unwarranted
While Credit Suisse certainly needs to strengthen its capital and add liquidity to calm stakeholders, the market’s fear appears to be overblown.
For instance, Credit Suisse’s CET1 ratio (it compares the bank’s capital to its risk-weighted assets) stood at 13.5% at the end of Q2, which is higher than the peer group average of 13.1%, and well above the regulatory requirements.
Further, its liquidity coverage ratio of 191% is the highest among its peers. Also, Credit Suisse’s HQLA (high-quality liquid assets) as a percentage of total assets stood at 32%, significantly higher than its peer group average of 19%.
Highlighting the company’s financial strength, Thomas Gottstein, Credit Suisse’s ex-CEO, said during the Q2 conference call, “Our Tier 1 leverage ratio of 6.1% is amongst the highest in our peer group.”
The Bottom Line on Credit Suisse
Undeniably, Credit Suisse is facing funding and litigation costs. Moreover, execution risk associated with the strategic plan to transform business and dilutive capital raise cannot be ignored. However, Credit Suisse has one of the best capital and liquidity positions, and concerns around its financial strength are unwarranted.
The financial services giant is focusing on lowering its cost base and strengthening businesses with higher return potential. All these factors augur well for growth.
However, given the short-term issues, Credit Suisse stock could stay volatile, which is why it sports a Moderate Sell consensus rating based on one Buy, seven Hold, and five Sell recommendations. Further, analysts’ average price target of SFr.5.72 implies 46.2% upside potential from current levels.
CS stock has negative indicators from hedge fund managers who sold 3.6 million shares last quarter. However, TipRanks’ investors are optimistic about CS stock, and 2.4% of these investors have increased their holdings in the past month.
