Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Given its low capital buffer and plans to lower it further, along with high market risk tolerance and leverage finance exposure, <a href="https://www.smartkarma.com/entities/credit-suisse-group-ag" target="_blank" data-smartkarma-citation="entities:22253:1" rel="noopener">Credit Suisse's (CSGN VX)</a> Additional Tier 1 (AT1) trades too tight relative to <a href="https://www.smartkarma.com/entities/ubs-group-ag" target="_blank" data-smartkarma-citation="entities:22590:1" rel="noopener">UBS (UBSG VX)</a> and most other large banks globally. We see better value elsewhere at this point in the credit cycle.Many analysts compare CS and UBS and conclude that they are largely the same, with UBS having deleveraged its investment banking franchise years earlier. We disagree. While both may suffer outflows in assets under management during a prolonged equity market correction, UBS has a far less market-sensitive franchise during intermittent bouts of volatility, as was clearly shown over the past year. In addition to having a higher trading risk tolerance profile, CS appears to have a higher sensitivity to non-investment grade leverage finance and oil &amp; gas exposures.  These are more sensitive to the business cycle. As of now, with global growth set to accelerate post-vaccination, this is a benefit. However, this is also already priced into CS’ securities.  In fact, the longer-dated AT1 bonds are priced to perfection, in our view.In addition, CS has a substantially lower Common Equity Tier 1 (CET1) buffer than UBS and many other European banks.  Furthermore, as CS targets an even lower capital ratio, this buffer is at risk of falling further over the near term. While lofty aspirations to operate at a higher leverage level may be aimed at equity holders, we think it best to take management’s word at face value. Lower capital ratios are not AT1 capital supportive. Unless the firm simultaneously de-risks, sensitivity to non-IG leverage finance and non-IG oil &amp; gas exposures may increase.Furthermore, while we were impressed by Mr. Hoarta-Osório’s leadership at <a href="https://www.smartkarma.com/entities/lloyds-banking-group-plc" target="_blank" data-smartkarma-citation="entities:21009:1" rel="noopener">Lloyds Bank (LLOY LN)</a> in the UK, despite several blemishes, we are surprised that the ex-CEO of a UK-centric mortgage bank would be chosen as Chairman of the Board at a global investment bank with wealth management growth aspirations in Asia. We are not convinced this is the best choice and we question if the execution risk from an eventual strategy pivot will be credit positive.We explore these themes and provide an overview of CS’s Q4 results within. We conclude that, taken together amongst its longer-dated peer-issued AT1 notes, we find better value in <a href="https://www.smartkarma.com/entities/societe-generale-sa" target="_blank" data-smartkarma-citation="entities:21478:1" rel="noopener">Société Générale's (GLE FP)</a> 2030 first call AT1 than in the recently issued Credit Suisse security. (Please see: <a href="https://www.smartkarma.com/insights/societe-generale-s-at1-better-fundamental-and-relative-value-than-bnp" target="_blank" data-smartkarma-citation="insights:48177" rel="noopener">Société Générale’s AT1: Better Fundamental and Relative Value than BNP</a> for more details on SocGen). We also see greater spread pick-up in Credit Suisse’s 2025 first call AT1 note than further out the curve.

Given its low capital buffer and plans to lower it further, along with high market risk tolerance and leverage finance exposure, Credit Suisse's (CSGN VX) Additional Tier 1 (AT1) trades too tight relative to UBS (UBSG VX) and most other large banks globally. We see better value elsewhere at this point in the credit cycle.Many analysts compare CS and UBS and conclude that they are largely the same, with UBS having deleveraged its investment banking franchise years earlier. We disagree. While both may suffer outflows in assets under management during a prolonged equity market correction, UBS has a far less market-sensitive franchise during intermittent bouts of volatility, as was clearly shown over the past year. In addition to having a higher trading risk tolerance profile, CS appears to have a higher sensitivity to non-investment grade leverage finance and oil &amp; gas exposures.  These are more sensitive to the business cycle. As of now, with global growth set to accelerate post-vaccination, this is a benefit. However, this is also already priced into CS’ securities.  In fact, the longer-dated AT1 bonds are priced to perfection, in our view.In addition, CS has a substantially lower Common Equity Tier 1 (CET1) buffer than UBS and many other European banks.  Furthermore, as CS targets an even lower capital ratio, this buffer is at risk of falling further over the near term. While lofty aspirations to operate at a higher leverage level may be aimed at equity holders, we think it best to take management’s word at face value. Lower capital ratios are not AT1 capital supportive. Unless the firm simultaneously de-risks, sensitivity to non-IG leverage finance and non-IG oil &amp; gas exposures may increase.Furthermore, while we were impressed by Mr. Hoarta-Osório’s leadership at Lloyds Bank (LLOY LN) in the UK, despite several blemishes, we are surprised that the ex-CEO of a UK-centric mortgage bank would be chosen as Chairman of the Board at a global investment bank with wealth management growth aspirations in Asia. We are not convinced this is the best choice and we question if the execution risk from an eventual strategy pivot will be credit positive.We explore these themes and provide an overview of CS’s Q4 results within. We conclude that, taken together amongst its longer-dated peer-issued AT1 notes, we find better value in Société Générale's (GLE FP) 2030 first call AT1 than in the recently issued Credit Suisse security. (Please see: Société Générale’s AT1: Better Fundamental and Relative Value than BNP for more details on SocGen). We also see greater spread pick-up in Credit Suisse’s 2025 first call AT1 note than further out the curve.

Credit Suisse – Perfection Priced into Long-Dated AT1

Silver Point

Thomas J. Monaco

Independent Insight Provider

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Equity Bottom-Up

<ul>
<li>Shares of Assured Guaranty (AGO.US) should continue to outperform in 2020.</li>
<li>AGO should realize benefits of a full year of favorable rating agency investment portfolio capital charges, and the repurchase USD 500 mn shares stock at accretive levels.</li>
<li>Value creation strategy at BlueMountain is earnings accretive and additive to capital return.</li>
</ul>


Shares of Assured Guaranty (AGO.US) should continue to outperform in 2020.
AGO should realize benefits of a full year of favorable rating agency investment portfolio capital charges, and the repurchase USD 500 mn shares stock at accretive levels.
Value creation strategy at BlueMountain is earnings accretive and additive to capital return.


Assured Guaranty – It Keeps Getting Better

United States

MBIA Inc. provides financial guarantee insurance and other forms of credit protection. The Company also offers investment management services to public finance and structured finance issuers, investors and capital market participants.

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Mbia Inc (MBI US)

Credit Suisse – Perfection Priced into Long-Dated AT1

Many analysts compare CS and UBS and conclude that they are largely the same. We disagree. Given its low capital buffer, higher leverage finance...

Hank Calenti, CFA

Assured Guaranty – It Keeps Getting Better

Shares of Assured Guaranty (AGO.US) should continue to outperform in 2020. AGO should realize benefits of a full year of favorable rating agency...

Thomas J. Monaco

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