Case Study on Credit Suisse (CS) with Nobias technology
Summary
In recent days, the rumor-mill on Twitter began circulating reports and headlines that Credit Suisse (CS) is headed towards a Lehman Brothers-like collapse due to rising credit default swaps.
CS’s credit default swaps are now approaching the highs seen during the 2008 financial crisis, which saw U.S. investment bank Lehman Brothers go bankrupt.
Yet, contrarian investors bought looked past rumors of the bank’s demise and bought the dip this week, causing a 30%+ rally.
Credible authors and analysts tracked by the Nobias algorithm do not agree with the stock’s recent bullish momentum.
In recent days, the rumor-mill on Twitter began circulating reports and headlines that Credit Suisse (CS) is headed towards a Lehman Brothers-like collapse due to rising credit default swaps. This put a major spotlight on CS shares as investors pondered whether or not the European banking system is headed towards a crisis reminiscent of the 2008 financial crisis in the United States. Others questioned whether or not Credit Suisse is an institution that is too big to fail?
CS Oct 2022
Looking at the company’s fundamentals, it’s clear that Credit Suisse is facing operational and balance sheet issues. And yet, after a late-September dip from the $5.00/share area to new 52-week lows of $3.71, the renewed focus on the bank this week inspired a 30.38% rally as contrarian investors placed bets against this Swiss bank’s demise.
Some of the bank's current operational issues were foreshadowed during the company’s recent second quarter earnings report. Anna Sokolidou, a Nobias 4-star rated analyst, covered those results in an article published on Seeking Alpha.
Looking at the bank’s top-line results, Sokolidou said, “In the past quarter, the bank's net revenues totaled CHF 1.15 billion, down from the value of CHF 2.02 billion reported for the previous quarter.”
Moving onto the bottom-line, Sokolidou continued, “The bank reported a net loss attributable to shareholders of CHF [the Swiss franc] 1.6 billion, compared to net income attributable to shareholders of CHF 253 million in 2Q21.” She also noted, “Credit Suisse's pre-tax loss totaled CHF 1.2 billion, quite a poor result compared to a pre-tax income of CHF 813 million in 2Q21.”
This report was published back in August, so it doesn’t factor in the latest headlines. However, after looking over Credit Suisse’s Q2 results, Sokolidou concluded: “Credit Suisse shares are highly undervalued right now.” This undervaluation reflects poor earnings results, numerous past scandals, and investors' uncertainty about the health of the global economy. Whilst I understand conservative people not wanting to risk buying the shares just yet, the current situation could be used as a good buying opportunity for patient long-term investors. CS shares used to trade much higher when the bank reported poorer results. The management's cost-saving initiatives might work and the geopolitical situation "shall pass too."’
Looking at the stock’s strong rally this week, it appears that the market agrees with Sokolidou’s take regarding an irrationally low valuation. Moving onto the recent “too big to fail” concerns, Shanthi Rexaline, a Nobias 4-star rated author, covered the Credit Suisse story in an article that was published on Benzinga this week.
Rexaline wrote, “Credit Suisse has seen its fundamentals deteriorate rapidly, thanks to a combination of macroeconomic factors and company-specific malaise. The bank has been rocked by a string of scandals and mishaps that impacted its financials, with the most notable being the situation that arose from the collapse of U.S. hedge fund Archegos Capital, founded by Bill Hwang, in early 2021.” “Additionally,” she continued, “the bank was fined by a Swiss court in June for the lax controls it had, which allowed one of its employees to help a Bulgarian drug ring launder money, the New York Times reported.”
Touching upon the primary catalyst for the concern surrounding the bank’s viability, Rexaline highlighted the company’s soaring credit default swaps. She said, “Credit Suisse’s Credit Default Swaps, or CDS, a derivative instrument that allows an investor to swap their credit risk with another investor, surged on Friday, reflecting the market perception of increasing risk. It is now approaching the highs seen during the 2008 financial crisis, which saw U.S. investment bank Lehman Brothers go bankrupt.”
Rexaline also quoted a report published in the Financial Times, which highlighted the company’s response to the bearish rumors. She said, “In a briefing note sent to clients, the bank said, “Our position in this respect is clear. Credit Suisse has a strong capital and liquidity position and balance sheet. Share price developments do not change this fact.”’
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Jordan Brodie Farooqui, a Nobias 4-star rated author, also published a report on the Credit Suisse sell-off last week. In an article published at ProactiveInvestors.com, Farooqui said, “Credit Suisse has also been in talks with investors to raise capital, Reuters reported, citing people close to the matter, including the chance that the lender may “largely” exit the American market.” He noted, “Credit Suisse said it is in the process of a strategy review, which would likely include asset sales and divestitures.”
Farooqui quoted John Vail, chief global strategist at Nikko Asset Management, who said, “The silver lining at the end of this period is the fact that central banks will probably start to relent some time as both inflation is down and financial conditions worsen dramatically.” Regarding the Credit Suisse news, Vail concluded, “I don’t think it’s the end of the world.”
However, looking at the opinions expressed by the credible authors and Wall Street analysts that the Nobias algorithm tracks, a bearish trend related to CS shares has clearly formed. After the 30%+ rally that CS shares experienced during the past week, only 25% of credible analysts predict that Credit Suisse shares are going to rise in value from the stock’s current $4.85 share price. Furthermore, 83% of recent articles published on Credit Suisse by credible authors have expressed a “bearish” bias. Therefore, this isn’t a rally that credible minds in the financial space want to chase.
Disclosure: Nicholas Ward has no CS position. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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