Market frets over Credit Suisse capital

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Brady Dougan, the chief executive of Credit Suisse, tried yesterday to calm concerns about the bank's strategy following a settlement with US authorities over tax avoidance. File photo: Bloomberg

Zurich - Credit Suisse chief executive Brady Dougan has sought to put the bank’s legal woes behind it by settling a three-year US tax investigation. However, he has not assuaged investor concern about the bank’s capital and strategy.

On Tuesday the bank agreed to pay a fine and its main banking unit pleaded guilty to a criminal charge in order to end an investigation into its use of secret Swiss accounts to help Americans hide money from the US taxman.

The $2.6 billion (R27bn) fine will cut Credit Suisse’s common equity ratio under the latest Basel rules to 9.3 percent from 10 percent at the end of March. That is the lowest among 16 global investment banks tracked by Bloomberg Industries.

Credit Suisse plans to raise about Sf500 million (R5.8bn) by selling property and to cut Sf14bn of risk-weighted assets to boost capital to 10 percent this year, its minimum target.

But analysts questioned whether Dougan’s plan would be enough. This week Deutsche Bank, Germany’s biggest bank, announced a stock offering to boost its common equity ratio to 11.8 percent from 9.5 percent.

“I’m somewhat surprised at how sanguine you are” about capital, Jernej Omahen, a London-based analyst at Goldman Sachs, said on a conference call with Dougan on Tuesday. “Why is it better to essentially scrape together these little capital releases” than “doing a capital increase and assuring everybody that you’re at the top of the capitalisation table?”

Chief financial officer David Mathers said the planned steps were “useful” measures that would improve the bank’s financial strength without diluting shareholdings.

The company also has shareholder authorisation to sell as many as 41 million shares to pay staff bonuses if its capital ratio is below the 10 percent requirement.

The bank said on Tuesday that it planned to pay out about half its annual earnings as dividends once it reached that capital level, while aiming to increase it to 11 percent in the longer term.

“Credit Suisse’s settlement could drive a number of changes”, including further cuts to the fixed-income business, Morgan Stanley analysts Huw van Steenis and Hubert Lam said in a note on Tuesday. “We trim our dividend expectations and think a dividend cut in 2014 plausible.”

For Credit Suisse, a high capital ratio is important to attract clients to its wealth management business, the fifth-biggest in the world. UBS, its larger Swiss competitor and the leading wealth manager, reported a common equity ratio of 13.2 percent at the end of March.

Dougan has so far resisted calls to shrink Credit Suisse’s debt trading unit – unlike UBS, which decided in 2012 to scale down its investment bank’s fixed-income operation to focus on money management.

He should do so, because the debt unit was not big enough to compete with global rivals, Kian Abouhossein, a banking analyst at JPMorgan Chase in London, said last month.

Credit Suisse chairman Urs Rohner told Neue Zuercher Zeitung in an interview published yesterday that he had ordered a review of the investment banking business, which could include bigger cuts, because the question was asked “time and again” by analysts.

“For us, the difference between the two major Swiss banks is in the strategies,” Tim Dawson, an analyst at Helvea in Geneva, said on Tuesday.

“In our opinion that of UBS seems clearer and simpler.”

Credit Suisse stock trades at about 8.6 times estimated earnings for 2015, while UBS has a ratio of about 11.6 times.

Moody’s Investors Service lowered the outlook for Credit Suisse’s credit ratings to negative, saying even the planned actions to boost capital “still could leave the bank’s capital ratios weaker than at most of its peers”. – Bloomberg


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