Shares of Credit Suisse Bank (CSGN.US), which caused a flurry of stock market speculation around the bank's potential bankruptcy and insolvency in early October, are still under bearish pressure. Credit Difault Swap (CDS) levels have climbed to new peaks:
- Credit Suisse's dollar-denominated bonds have fallen recently, and CDS spreads have jumped to record highs near 444 basis points. Reuters pointed out that CDS levels are now comparable to Italy's Banca Monte dei Paschi at 466 basis points, with it already a bailed-out bank;
- By comparison, Commerzbank, Santander and UBS named among potentially troubled banks are keeping their CDS spreads much lower, in the 70-80 bps range. Bank analysts at ABN Amro commented on the situation, stressing that "investor confidence has not yet been restored." Credit Suisse's Q3 financial report negatively surprised the market;
- Credit Suisse is currently in the process of issuing new shares in connection with a planned CHF 2.24 billion capital raise as part of a broader CHF 4 billion 'rescue' capital action;
- Concerns around a potential deep recession in Europe and the ECB's tightening of monetary policy are increasing risks for the financial industry. Energy prices are also a problem, and although they have stabilized recently, they still remain uncertain which could translate into increased credit risk.
Start investing today or test a free demo
Open real account TRY DEMO Download mobile app Download mobile appCDS spreads widened at the end of November and are again reaching record levels near 450 points. Source: Bloomberg, BondEvalue
Priced in U.S. dollars, Credit Suisse bonds continue to fall, indicating rising expected financial stability. Source: BondEvalue
What are CDSs?
- A Credit Default Swap is a hedge against default and a type of contract between parties that is part of the pricing of the risk of potential default or the occurrence of other negative events. An important factor affecting the CDS spread is the measure of the risk of the transaction as estimated by rating institutions like Fitch, Standard&Poor's and Moody's;
- A widening CDS spread of an institution means increasing certainty among speculators about its future problems. At the present time, the vast majority of CDSs are so-called 'naked CDSs', traded by institutions that do not simultaneously own the debt (bonds) of the entity whose CDS contracts they trade;
- In the past, the CDS tool was often criticized, however, according to regulators, it accelerated the bankruptcy processes of entities that would inevitably have to go through it anyway. So we can take a chance and consider the CDS spread as the market's ability to price the probability of a possible threat of financial instability.
Credit Suisse (CSGN.CH) shares, H4 interval. Credit Suisse shares are near all-time low levels with Price to Book ratio at 0,20 level. Those 80% discount book value levels might be readen as a potentiall bankruptcy risk sign. Source: xStation5
The content of this report has been created by XTB S.A., with its registered office in Warsaw, at Prosta 67, 00-838 Warsaw, Poland, (KRS number 0000217580) and supervised by Polish Supervision Authority ( No. DDM-M-4021-57-1/2005). This material is a marketing communication within the meaning of Art. 24 (3) of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (MiFID II). Marketing communication is not an investment recommendation or information recommending or suggesting an investment strategy within the meaning of Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC and Commission Delegated Regulation (EU) 2016/958 of 9 March 2016 supplementing Regulation (EU) No 596/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the technical arrangements for objective presentation of investment recommendations or other information recommending or suggesting an investment strategy and for disclosure of particular interests or indications of conflicts of interest or any other advice, including in the area of investment advisory, within the meaning of the Trading in Financial Instruments Act of 29 July 2005 (i.e. Journal of Laws 2019, item 875, as amended). The marketing communication is prepared with the highest diligence, objectivity, presents the facts known to the author on the date of preparation and is devoid of any evaluation elements. The marketing communication is prepared without considering the client’s needs, his individual financial situation and does not present any investment strategy in any way. The marketing communication does not constitute an offer of sale, offering, subscription, invitation to purchase, advertisement or promotion of any financial instruments. XTB S.A. is not liable for any client’s actions or omissions, in particular for the acquisition or disposal of financial instruments, undertaken on the basis of the information contained in this marketing communication. In the event that the marketing communication contains any information about any results regarding the financial instruments indicated therein, these do not constitute any guarantee or forecast regarding the future results.
