Credit Suisse can stop rot with $5 bln cash call
LONDON, Oct 5 (Reuters Breakingviews) - Swiss banks are generally known for their solidity and predictability. Credit Suisse (CSGN.S) has offered customers and investors the opposite over the past 18 months. Chair Axel Lehmann can shore things up by halving the size of its accident-prone investment bank and slashing costs. To shrink, he’ll need more capital. The cleanest and quickest way to do that is to tap shareholders.
The Zurich-based bank’s debt and equity went into a tailspin on Monday, fuelled by unsubstantiated social-media chatter that it could go bust. There’s no reason to think that’s likely, and the selloff quickly reversed on Tuesday. But its share price and risky bonds still signal distress. Credit Suisse equity is valued at around $11 billion. One of its additional Tier 1 securities – a form of debt that can turn into equity – yields almost 15%, compared with 10% in the summer. The investment bank has racked up $4.5 billion of losses since the start of 2021, while senior dealmakers and wealth managers are leaving.
Lehmann, who is due to unveil his new strategy on Oct. 27, therefore has to take radical steps. One priority is turning the investment bank into a steadier, more “capital-light” business focused on dealmaking and fundraising, rather than trading debt securities. Doing so will be expensive. Imagine Credit Suisse winds down credit trading and half of the other fixed-income businesses by putting them into a “bad bank”, leaving behind a smaller unit focused on safer bonds and foreign exchange. Using RBC’s estimates of the division’s balance sheet, that would imply shedding $24 billion of risk-weighted assets.
The last time Credit Suisse set up a bad bank, the unit’s pre-tax losses amounted to a fifth of the risk-weighted assets it shed. A similar performance this time would knock $4.7 billion off the bank’s equity. However, the move would also free up $3.2 billion of capital, using the bank’s 13.5% common equity Tier 1 ratio. Overall, the net hit to capital would be $1.5 billion.
That would only be the start, though. Lehmann has also promised to cut up to $1.5 billion of costs across the group, partly by simplifying its back-office technology processes. Investment banks tend to incur restructuring charges equivalent to three-quarters of the targeted cuts, KBW analysts reckon. That would knock a further $1.1 billion off the bank’s equity.
Finally, putting Credit Suisse on a surer footing means building up a buffer for future litigation or other charges, including any fines or settlements related to collapsed hedge fund Archegos Capital Management and supply chain lender Greensill Capital. RBC pegs total litigation expenses at $2 billion between 2023 and 2025. Add that to the restructuring and bad bank costs, and the total hit to capital would be $4.7 billion.
Lehmann will be loath to ask shareholders for a cash infusion equivalent to two-fifths of the company’s market capitalisation. That’s why he is considering selling businesses, according to people familiar with the matter. The obvious candidate is Credit Suisse’s securitised products group, one of the few bright spots in its investment bank. A sale at book value could raise $2.7 billion, assuming equity is 13.5% of risk-weighted assets. Possible bidders include Apollo Global Management (APO.N) and BNP Paribas (BNPP.PA). But it would be unwise to bank on a quick sale given volatile credit markets.
Credit Suisse could mimic Deutsche Bank (DBKGn.DE), which raised cash by floating a minority stake in its asset-management business in 2018. But Credit Suisse’s own funds unit is tainted by the Greensill saga. Selling shares in its domestic Swiss unit, worth $10 billion according to JPMorgan analysts, could herald a Credit Suisse breakup. Besides, any initial public offerings would remain at the mercy of volatile markets.
The cleanest way to draw a line under Credit Suisse’s problems would therefore be to ask key shareholders like the Qatar Investment Authority for the cash. To cough up $4.7 billion, they would have to believe that the bank’s value will eventually increase by at least the same amount. That implies a market capitalisation of at least $15.8 billion. Assuming Credit Suisse’s tangible book value after the cash call was roughly the same as it is now, the bank would have to trade at about a third of book value, compared with one-quarter today. But that would still be a fraction of the value investors attach to Swiss rival UBS (UBSG.S).
The bigger risk is that Lehmann shies away from bold steps, choosing to marginally trim the investment bank. That would be a mistake. Absent a major restructuring, Credit Suisse’s funding costs would remain elevated and its wealth clients jumpy. The bank would remain vulnerable to future market shocks. Any Credit Suisse turnaround will be slow and complicated. But it starts by raising fresh equity from investors.
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Credit Suisse’s share price was 4.18 Swiss francs as of 0926 GMT on Oct. 5, 3% below the previous day’s close and more than 50% down from the start of 2022.
One of the bank’s dollar-denominated additional Tier 1 securities, a risky form of debt that can turn into equity during a crisis, yielded 14.9% as of 0924 GMT, compared with around 10% throughout most of July and August.
The bank said on Sept. 26 that it was “well on track” with its strategic review, “including potential divestitures and asset sales”.