Credit Suisse Isn't Out Of The Woods Yet

Credit Suisse Group AG (NYSE: CS) bounced off their Tuesday morning lows to trade slightly higher in early afternoon trading. However, in a new note to clients, JPMorgan analyst Roberto Henriques urged investors to avoid buying the stock on the Archegos Capital dip.

What Happened? On Tuesday, Henriques reiterated his Underweight rating for Credit Suisse bonds after the company announced a $4.7-billion charge tied to the meltdown of U.S. hedge fund Archegos.

What’s Next? While the uncertainty of the exact size of the immediate Archegos losses is now over, Henriques said Credit Suisse is not out of the woods just yet.

“With the departure of both the IB CEO and Risk and Compliance officers setting the tone, clearly the failings in risk management appear quite serious, and while the worst financially may have been avoided, we suspect the bank may well also be faced with higher capital requirements in the form of a Pillar 2R add-ons as a result,” Henriques said.

In the longer term, Henriques said the Archegos incident will likely have a lasting impact on Credit Suisse’s reputation, which could weigh on risk premiums even after the bank has fully recapitalized.

Related link: BofA Downgrades Credit Suisse Again: Archegos Losses 'Double What We Expected'

JPMorgan’s commentary on Credit Suisse bonds comes the same day Bank of America downgraded Credit Suisse’s Swiss-listed stock from Neutral to Underperform and cut its price target from $12.19 to $10.69.

Credit Suisse has already suspended its buyback program and proposed cutting its 2.7% dividend.

The good news for Credit Suisse bondholders is that Henriques said credit rating agencies will reaffirm the bank’s current ratings, even though the $4.7 billion charge was more than double what Bank of America was anticipating.

Benzinga’s Take: Credit Suisse finally knows exactly how big the losses from Archegos will be, which is likely the reason why the stock is slightly higher on Tuesday even though the losses were larger than expected.

Plenty of uncertainty remains surrounding the lasting impact of the disaster, including the hunt for new management and possible changes to the bank’s risk management that could impact its future earnings power.

(Photo: Credit Suisse)