Equity Analyst, Event-driven, Quiddity Advisors

Janaghan Jeyakumar, CFA

Equity Analyst, Event-driven

Quiddity Advisors

Event-Driven

<ul>
<li>In this insight, we take a look at the names leading the race to become ADDs/DELs for the STX Europe 600 and EUROSTX Indices for the March 2023 Rebalance.</li>
<li>STX Europe 600 members <a href="https://www.smartkarma.com/entities/credit-suisse-group-ag-f4b24f0c-c294-40b3-b491-759f0cb277e9" target="_blank" data-smartkarma-citation="entities:27915:1" rel="noopener">Credit Suisse (CSGN SW)</a> and <a href="https://www.smartkarma.com/entities/vantage-towers-ag" target="_blank" data-smartkarma-citation="entities:35602:1" rel="noopener">Vantage Towers (VTWR GR)</a> could possibly get deleted in the next few months triggering intra-review ADDs.</li>
<li>Separately, I see 3 more ADDs and DELs for the STX Europe 600 index in the regular review in June 2023.</li>
</ul>


In this insight, we take a look at the names leading the race to become ADDs/DELs for the STX Europe 600 and EUROSTX Indices for the March 2023 Rebalance.
STX Europe 600 members Credit Suisse (CSGN SW) and Vantage Towers (VTWR GR) could possibly get deleted in the next few months triggering intra-review ADDs.
Separately, I see 3 more ADDs and DELs for the STX Europe 600 index in the regular review in June 2023.


Quiddity Leaderboard SE600 Jun 23: Credit Suisse, Vantage Towers, and 3 Regular Changes

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Executive Summary: <a href="https://www.smartkarma.com/entities/credit-suisse-group-ag" target="_blank" data-smartkarma-citation="entities:22253:1" rel="noopener">Credit Suisse Group's (CSGN VX)</a> press release of this morning is no reason to buy its Contingent Capital (CoCos). Credit Suisse is skating on thin ice from a capital perspective. Another loss of less than CHF2bn (US$2.1bn) could result in the suspension of coupons on CS’ Contingent Capital securities. This is one-half the charges related to the Archegos Capital Management affair. This leaves little room for maneuver.A warm wind blowing from a hot US economy could crack the ice. Low interest rates, which are pushing investors to take more risk, are generating asset bubbles. CS, like other banks, intermediates in this asset-inflated environment. Unlike other banks, something as simple as an unexpected spike in interest rates could be the catalyst which leads to a fissure in the firm’s capital layer. Another family or hedge fund disaster like Archegos and CS’ CoCo coupons could be at risk.Bank capital analysis is arcane and further complicated by selective disclosure. CoCo investors may not be aware of how slim CS’ capital buffer truly is. And yet, this is at the core of whether the security is under- or over- priced. We deconstruct the press release to determine this level within.As we noted in <a href="https://www.smartkarma.com/compose/insight/49970/Credit%20Suisse:%20Where%20There%E2%80%99s%20Smoke,%20There%E2%80%99s%20a%20Capital%20Raise.%20Read%20more:%20https:/skr.ma/yxeJd" target="_blank" rel="noopener">Credit Suisse: Where There’s Smoke, There’s a Capital Raise</a>, we were fortunate to be ahead of the market with our Underweight recommendation on CS bonds. When we initiated this call, the CS 4.5% coupon 2030 callable Additional Tier 1 bond was trading close to par. It is now trading around $95.We continue to believe that Credit Suisse needs to enhance its capital base. Assuming no additional cracks in the ice – a large assumption - it may take CS two quarters to achieve current UBS-type capital buffer levels. However, CS has a materially higher risk tolerance and is clearly impaired from a risk management perspective. At least, one full year of earnings retention may be needed to address these deficiencies. Furthermore, there are weak spots yet to traverse including legacy RMBS costs, CS Supply Chain Fund shortfalls and a debt scandal in Mozambique to say nothing of increased regulatory capital charges following recent events. Together, these may see to it that share buybacks are suspended for some time to come. This would be beneficial for CS’ debt capital over time. In the interim CS’ CoCos may recover somewhat; however, we continue to believe that these securities will lag the market until the layer of capital is strengthened. As such, we remain Underweight.

Executive Summary: Credit Suisse Group's (CSGN VX) press release of this morning is no reason to buy its Contingent Capital (CoCos). Credit Suisse is skating on thin ice from a capital perspective. Another loss of less than CHF2bn (US$2.1bn) could result in the suspension of coupons on CS’ Contingent Capital securities. This is one-half the charges related to the Archegos Capital Management affair. This leaves little room for maneuver.A warm wind blowing from a hot US economy could crack the ice. Low interest rates, which are pushing investors to take more risk, are generating asset bubbles. CS, like other banks, intermediates in this asset-inflated environment. Unlike other banks, something as simple as an unexpected spike in interest rates could be the catalyst which leads to a fissure in the firm’s capital layer. Another family or hedge fund disaster like Archegos and CS’ CoCo coupons could be at risk.Bank capital analysis is arcane and further complicated by selective disclosure. CoCo investors may not be aware of how slim CS’ capital buffer truly is. And yet, this is at the core of whether the security is under- or over- priced. We deconstruct the press release to determine this level within.As we noted in Credit Suisse: Where There’s Smoke, There’s a Capital Raise, we were fortunate to be ahead of the market with our Underweight recommendation on CS bonds. When we initiated this call, the CS 4.5% coupon 2030 callable Additional Tier 1 bond was trading close to par. It is now trading around $95.We continue to believe that Credit Suisse needs to enhance its capital base. Assuming no additional cracks in the ice – a large assumption - it may take CS two quarters to achieve current UBS-type capital buffer levels. However, CS has a materially higher risk tolerance and is clearly impaired from a risk management perspective. At least, one full year of earnings retention may be needed to address these deficiencies. Furthermore, there are weak spots yet to traverse including legacy RMBS costs, CS Supply Chain Fund shortfalls and a debt scandal in Mozambique to say nothing of increased regulatory capital charges following recent events. Together, these may see to it that share buybacks are suspended for some time to come. This would be beneficial for CS’ debt capital over time. In the interim CS’ CoCos may recover somewhat; however, we continue to believe that these securities will lag the market until the layer of capital is strengthened. As such, we remain Underweight.

Credit Suisse: Skating on a Thin Layer of Capital

The pricing of <a href="https://www.smartkarma.com/entities/credit-suisse-group-ag" target="_blank" data-smartkarma-citation="entities:22253:1" rel="noopener">Credit Suisse Group (CSGN VX)</a> bonds does not fully reflect the risks, complexity, and low capitalization of the firms’ underlying business model; nor does it capture potential franchise impairment from increasing reputation risk. The recent suspension of redemptions from certain CS funds is at best an embarrassment and at worst a signal that controls remain in need of considerable attention. This is unfortunate, as CS is highly geared to the business cycle and could outperform peers, if it can get its house in order. However, CS’s long-dated Additional Tier 1 bonds already trade tight relative to the challenges facing the firm. Please see: <a href="https://www.smartkarma.com/insights/credit-suisse-perfection-priced-into-long-dated-at1" target="_blank" data-smartkarma-citation="insights:48461" rel="noopener">Credit Suisse – Perfection Priced into Long-Dated AT1</a>. As such, we place an Underweight recommendation of CS notes.As Credit Suisse aims to increase its Asset Management (AM) business, the firm is caught between a rock and a hard place with its fund investors. CS froze $10 billion of AM funds linked to assets sourced from Greensill Capital. Known as CS Supply Chain Finance Funds, more than 1,000 institutional and professional investors cannot redeem their holdings in these funds. This also affects all pending redemption requests filed prior to the CS announcement of 1 March. This is not the first blemish on CS’s reputation as it has repeatedly stepped-in it over the last few years and we are increasingly concerned that it may not be the last. In this instance, however, there are reputational and fiduciary issues which could have a more detrimental impact on the franchise. Fortunately, CS cited its fiduciary duty in barricading fund redemptions. This irony seems lost in the marketplace.Taken together, this cannot endear investors in Asia to entrust their wealth with the firm. Asia is Credit Suisse’s targeted growth market. Other wealth managers may capitalize on the repeated missteps.  Furthermore, we also note that both CS and <a href="https://www.smartkarma.com/entities/ubs-group-ag" target="_blank" data-smartkarma-citation="entities:22590:1" rel="noopener">UBS Group (UBSG VX)</a> long duration bonds sold-off more than others during last week’s Treasury Tantrum. Bad volatility is not beneficial for CS’ or UBS’ wealth management franchises. However, CS widened by more than UBS and, unlike UBS, it did not tighten enough to offset the price decline. Taken together we perceive CS bonds as being at a greater risk of repricing downwards as the year progresses.

The pricing of Credit Suisse Group (CSGN VX) bonds does not fully reflect the risks, complexity, and low capitalization of the firms’ underlying business model; nor does it capture potential franchise impairment from increasing reputation risk. The recent suspension of redemptions from certain CS funds is at best an embarrassment and at worst a signal that controls remain in need of considerable attention. This is unfortunate, as CS is highly geared to the business cycle and could outperform peers, if it can get its house in order. However, CS’s long-dated Additional Tier 1 bonds already trade tight relative to the challenges facing the firm. Please see: Credit Suisse – Perfection Priced into Long-Dated AT1. As such, we place an Underweight recommendation of CS notes.As Credit Suisse aims to increase its Asset Management (AM) business, the firm is caught between a rock and a hard place with its fund investors. CS froze $10 billion of AM funds linked to assets sourced from Greensill Capital. Known as CS Supply Chain Finance Funds, more than 1,000 institutional and professional investors cannot redeem their holdings in these funds. This also affects all pending redemption requests filed prior to the CS announcement of 1 March. This is not the first blemish on CS’s reputation as it has repeatedly stepped-in it over the last few years and we are increasingly concerned that it may not be the last. In this instance, however, there are reputational and fiduciary issues which could have a more detrimental impact on the franchise. Fortunately, CS cited its fiduciary duty in barricading fund redemptions. This irony seems lost in the marketplace.Taken together, this cannot endear investors in Asia to entrust their wealth with the firm. Asia is Credit Suisse’s targeted growth market. Other wealth managers may capitalize on the repeated missteps.  Furthermore, we also note that both CS and UBS Group (UBSG VX) long duration bonds sold-off more than others during last week’s Treasury Tantrum. Bad volatility is not beneficial for CS’ or UBS’ wealth management franchises. However, CS widened by more than UBS and, unlike UBS, it did not tighten enough to offset the price decline. Taken together we perceive CS bonds as being at a greater risk of repricing downwards as the year progresses.

Credit Suisse: Greensill Sows Reputation Risks, Underweight CS Bonds

Research Firm with a Qualitative Overlay, Pearl Gray Equity and Research

Pearl Gray Equity and Research

Research Firm with a Qualitative Overlay

Quantitative fund & research firm with a qualitative overlay. 

Our coverage: General U.S. with a skew towards the primary sector. 

Methods: Smart Beta/Factor Pricing, Neural Networks, Street Gossip, and Common Sense.

Equity Bottom-Up

<ul>
<li>A flight to safety from the bank's depositors and asset management clients has caused a maturity mismatch, which could affect the firm's net interest income.</li>
<li>The outcome of Credit Suisse's investment banking unit pivot is near impossible to call, but a few key indicators provide an interesting juxtaposition.</li>
<li>And there we have it, folks; Credit Suisse Group AG's (NYSE:CS) stock is essentially a distressed asset.</li>
</ul>


A flight to safety from the bank's depositors and asset management clients has caused a maturity mismatch, which could affect the firm's net interest income.
The outcome of Credit Suisse's investment banking unit pivot is near impossible to call, but a few key indicators provide an interesting juxtaposition.
And there we have it, folks; Credit Suisse Group AG's (NYSE:CS) stock is essentially a distressed asset.


Senior Equity Derivatives Trader

Simon Harris

<ul>
<li>Company making headlines over possible liquidity issues along with Deutsche Bank</li>
<li>CDS has blown out to GFC levels, driving implied vols higher</li>
<li>Sell volatility on a relative basis to monetise the spike in option premium</li>
</ul>


Company making headlines over possible liquidity issues along with Deutsche Bank
CDS has blown out to GFC levels, driving implied vols higher
Sell volatility on a relative basis to monetise the spike in option premium


EQD | Credit Suisse (CSGN SW): Fears of Bank Failure Are Unjustified. Sell the Spike in Volatility

Switzerland

Credit Suisse Group AG operates as a wealth management firm. The Company specializes in investment banking and offers wealth management activities aiming to capitalize on both the large pool of wealth within mature markets, as well as the significant growth in wealth in Asia Pacific and other emerging markets. Credit Suisse Group serves customers worldwide.

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Credit Suisse Group (CSGN SW)

Quiddity Leaderboard SE600 Jun 23: Credit Suisse, Vantage Towers, and 3 Regular Changes

Currently, Gerresheimer AG (GXI GR) and Loomis AB (LOOMB SS) are the highest-ranked non-constituents and could be favourites to become intra-review...

Janaghan Jeyakumar, CFA

Credit Suisse: Skating on a Thin Layer of Capital

CS is skating on thin ice from a capital perspective while its risk management blade is dulled. Asset bubbles could crack the ice. A loss of less...

Hank Calenti, CFA

Credit Suisse: Greensill Sows Reputation Risks, Underweight CS Bonds

CS bonds do not fully reflect the risks, complexity, and low capitalization of the firms’ underlying business model; nor do they capture potential...

Hank Calenti, CFA

Credit Suisse: Key Line Items Assessed

A flight to safety from the bank's depositors and asset management clients has caused a maturity mismatch, which could affect the firm's net...

Pearl Gray Equity and Research

EQD | Credit Suisse (CSGN SW): Fears of Bank Failure Are Unjustified. Sell the Spike in Volatility

A look at Credit Suisse to assess the rumours of bank failure. We see an opportunity to sell the spike in implied vols against DBK which has also...

Simon Harris

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