Credit Suisse's robust capital and liquidity suggest market fears overblown

Credit Suisse Group AG's capital and liquidity levels compare favorably to those of its peers, S&P Global Market Intelligence data shows, indicating that concerns about the bank's future viability may be overblown.

The Swiss group's shares and bonds were battered on the markets earlier this month, with credit default swap spreads hitting a decade high as investors rushed to hedge risks ahead of the bank's latest restructuring update expected on Oct. 27.

While Credit Suisse may incur some losses from expected asset sales, the risk of default remains low, according to market observers. Looking at the bank's capital and liquidity positions, "it is unlikely that Credit Suisse will meet a fate similar to that of Lehman Brothers in 2008," Angelo Ranaldo, professor of systemic risk at the University of St. Gallen, said in a written comment Oct. 3.

As of the second quarter of 2022, Credit Suisse's liquidity coverage ratio — a measure of the share of highly liquid assets held by a bank to ensure its ability to meet short-term obligations — was the highest among big European investment banks.

Credit Suisse also outranked all of its comparable European peers it terms of leverage ratio, which measures a bank's Tier 1 capital against its total on- and off-balance sheet exposures, and is designed to highlight any build-up of excessive leverage. Credit Suisse's second-quarter leverage ratio was 6.1%, compared to an average ratio of roughly 4.75% in the rest of the sample, Market Intelligence data shows.

Credit Suisse had the second-highest total capital ratio of 19.39% and the fourth-highest common equity Tier 1 ratio of 13.5% in the sample based on second-quarter figures.

The Swiss group had the second-highest net stable funding ratio, which measures a bank's available stable funding against its required stable funding and reflects its ability to cover long-term liquidity obligations. Global regulators require the NSFR to equal or exceed 100%. As of the second quarter, Credit Suisse's NSFR was 132%.

As of June 30, the bank's total assets amounted to CHF727 billion with risk-weighted assets, or RWAs, standing at CHF274 billion, meaning risky assets accounted for 37.73% of total assets.

Credit Suisse's total loss absorbing capacity, or TLAC, ratio — measuring the share of assets eligible to be used to bail in a bank if it runs into trouble — was 35.2%, compared to the 27.9% minimum required by Swiss authorities, according to estimates by the fixed-income research team at Dutch bank ABN Amro.

This creates a buffer of 7.3 percentage points, or CHF20 billion in terms of RWAs, which would be sufficient to capture potential losses from future asset sales, Joost Beaumont, a senior fixed income strategist at ABN Amro said in an Oct. 3 note.

Despite its current woes, Credit Suisse's liquidity and capital adequacy ratios are unlikely to change materially in the third quarter, Beaumont told Market Intelligence. "I expect these to remain at around current levels," he said in a written comment.