To The Moon

In a jittery market, We discuss the funding and liquidity profile of$Credit Suisse Group AG(CS)$ in detail below.

Funding Profile

As at end-2022 Credit Suisse had SFr531bn liabilities and equities, split SFr234bn deposits (SFr68bn time, SFr122bn demand, SFr44bn savings), SFr157bn long-term debt, SFr45bn equity, SFr23bn short-term borrowings (incl. CD, CP, structured notes <1 year), and SFr23bn repurchase agreements (of which SFr21bn is subject to enforceable master netting agreements).

Almost all of the deposits have contractual maturity <1 year (as one would expect) and the proportion of deposit balances that are not covered by national deposit guarantee schemes (e.g. Swiss guarantee scheme of up to SFr100k) is not disclosed, but one would expect this to be higher than most European banks due to the focus on HNW/UNHW customers. Of the long-term debt SFr28bn has contractual maturity <1 year.

Liquidity Profile

Customer deposits declined by 40% qoq in 4Q22, leading to a decline in LCR from 192% in the 3-months to end-September to 144% in the 3-months to end-December, albeit the CEO has since noted an improvement to 150%.

In the (delayed) annual report CS notes that “these outflows stabilized to much lower levels but had not yet reversed as of the date of this report”. HQLA portfolio totals SFr118bn, of which SFr62bn is cash held at central banks, primarily the SNB, the Fed and the ECB. The remaining SFr56bn is the market value of securities issued by governments and government agencies, primarily from the US and UK.

Credit Suisse also notes that in the event of a liquidity crisis, it has a ‘Contingency Funding Plan’ which provides for specific actions to be taken depending on the nature of the crisis, with “primary objectives to strengthen liquidity (immediate), reduce funding needs (medium term) and assess recovery options (longer term)”.

CDS / Credit Rating Implications – Credit Suisse’s CDS is trading at elevated levels. This itself has little immediate consequence for the bank, but any knock-on impact to sentiment risks potentially impacting on customer deposit behaviour and/or on the pricing demanded by the market for any new term issuance.

Credit Suisse Valuation

We have a target price of SFr3.1 for Credit Suisse, based on a combined valuation approach. We take the average of the fair value of a Group DDM approach and SOTP model:

– The Group DDM model assumes a 10.2% CoE and 2% LTG.

– The simple SOTP applies a c9.0x 2025E P/E multiple to the “stable” businesses and c5.0x to investment banking.

Note we assign a negative value to the Corporate Centre and Capital Release Unit (CRU) and to ‘one-off’ below the line items.

Risks

We rate the stock High Risk. The key risks to our investment thesis and target price on Credit Suisse are:

• Execution risk on the planned restructuring, with a potentially greater-than-anticipated loss of earnings;

• Changing capital markets conditions, with shifting valuations and volumes in the broader markets.

• A risk of further wealth management outflows if sentiment towards the company deteriorates again.If the impact on the company from any of these factors differs from our base case expectations, the stock could have difficulty achieving our target price or could increase more than we expect.

Disclosure for investors in the Republic of Turkey: Under Capital Markets Law of Turkey (Law No: 6362), the investment information, comments and recommendations stated here, are not within the scope of investment advisory activity. Investment advisory service is provided in accordance with a contract of engagement on investment advisory concluded between brokerage houses, portfolio management companies, non-deposit banks and clients. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely to this information stated here may not bring about outcomes that fit your expectations. Furthermore, Citi Research is a division of Citigroup Global Markets Inc. (the “Firm”), which does and seeks to do business with companies and/or trades on securities covered in this research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report, however investors should also note that the Firm has in place organisational and administrative arrangements to manage potential conflicts of interest of this nature.