Key points:
- CS stock is down 5.6% this morning
- Weekend rumours of solvency problems are very wild indeed
- Credit Suisse has a difficult position
Credit Suisse (NYSE: CS) stock is down 5.6% after weekend talk and worries about solvency and capital ratios. This could be seen as an extreme reaction but it's also true that CS stock is trading at distressed levels – 60% down over the past year for example. This really being something of an oddity for banks should do better when interest rates rise. As we've pointed out before concerning the British banks rising interest rates increase net interest margins. That is, lending rates go up faster than deposit rates.
Credit Suisse, though has other worries. On Friday the price for insuring lending to CS – a credit swap that is – rose to 2.47%. That's very nearly 5 times what it was at the beginning of the year and is a huge price for a fully solvent bank. That is all it is of course – it's not a claim that CS is insolvent. Markets can indeed get overexcited. It's also true that such credit default swaps are traded as their own speculative instruments.
The problem itself is that it is clear that CS needs to raise capital from somewhere. Not because it's about to fall over, but because the world simply wants banks to have lots more capital these days. Under the usual rules of 20 years ago Credit Suisse would be fine with its current capital base. Today, it's not, given how times have changed.
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The real point here is that Credit Suisse wants to have a 14% capital ratio. So, it requires capital from elsewhere. One obvious possible source is the stockholders by way of a rights issue. But the idea that one of those is coming down the pike is exactly what cuts said CS stock price. Making any capital raise in that manner more expensive. That it would be ever more dilutive is what keeps pressuring the price lower. It's a loop, even if it's not a doom loop.
Of course, there is always the possibility of shrinking the business. But that in itself requires capital – you don't get to just let bankers go without having to give them a decent check as they go through that door. Or it's possible to exit entire lines of business and so on – but that doesn't particularly raise that capital ratio.
Perhaps some part of the business could be sold off? Perhaps – but given the likely recession, there aren't that many buyers for investment banking operations right now.
All of this has been spiced up by the leaking of a letter to staff from the CEO. Essentially, saying that he's got a plan but he just can't tell anyone about it just yet. Later this month he will.
In effect, the Credit Suisse share price is falling because it's in a not very good position. In the memo to staff, the bank's CEO reportedly said there are “many factually inaccurate statements being made”.
