Credit Suisse's shares need 'clarity' to halt slump, says JPMorgan

While the bank continues to get buffeted by negative newsflow on uncertainty over its strategy, clarity on its restructuring plans can help to restore stability, wrote expert in a note

The time has come for Credit Suisse Group AG to undergo a “final restructuring” to pivot away from investment banking and focus on wealth management, JPMorgan Chase & Co. analysts said, upgrading their rating on the stock to neutral.
 

While the bank continues to get buffeted by negative newsflow on uncertainty over its strategy, clarity on its restructuring plans can help to restore stability, analysts led by Kian Abouhossein wrote in a note.
 

Shares jumped as much as 5% on Thursday before paring most of those gains, in the latest gyration for a stock that’s plummeted more than 50% this year as Credit Suisse struggles to contain the impact from losses that have left its investment bank on the ropes. The lender is set to unveil a strategic review this month that’s expected to show it beating a major retreat away from that line of business.
 

With its current $11 billion market value, Credit Suisse should do all it can to avoid a capital increase that would leave shareholders significantly diluted, Abouhossein said. JPMorgan raised its recommendation on the Swiss lender to neutral from underweight. 

Abouhossein analyzed “binary options” for what Credit Suisse managers might do as they seek to turn its fortunes around.

Both of the two scenarios he looked at would lead to “material long term revaluation potential” even as any new strategy would face uncertainty and execution risk, he wrote. He said he sees $15 billion as a “minimum value today” for Credit Suisse, in line with his estimated value for the Swiss legal entity.

The Scenarios
 

In a first scenario examined by Abouhossein, the lender carries out a major restructuring with 70% shrinkage of investment banking and sells the SPG business, which trades securities that are backed by pools of mortgages and other assets, for a book value of around 3 billion francs ($3.1 billion).

“It needs to undertake a decisive restructuring of its IB business, rather than another piecemeal restructuring similar to what has been done several times over the last decade,” he wrote.
 

A second scenario assumes “yet another ‘half-hearted’ IB restructuring” that would pressure the share price, sparking further M&A speculation as initial funding concerns emerge.

Credit Suisse could counter a potential acquisition by spinning off its Swiss retail legal entity to current shareholders, Abouhossein wrote.

JPMorgan also cut its price target for the Swiss lender to CHF6 from CHF6.80. The shares were up 1.3% to CHF4.165 at 12:13 p.m. in Zurich, 44% below the trimmed target.

The lender now has four buy, 16 hold and eight sell recommendations, according to data tracked by Bloomberg.