Credit Suisse Guilty Plea Stokes Investors’ Strategy Concern

May 21, 2014 4:50 am ET

(Updates with chairman’s comments, Moody’s action from 11th paragraph.)

May 21 (Bloomberg) -- Credit Suisse Group AG Chief Executive Officer Brady Dougan sought to put the bank’s legal woes behind it with the U.S. tax-probe settlement. He hasn’t assuaged investor concern about the bank’s capital and strategy.

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

Credit Suisse plans to raise about 500 million francs ($560 million) by selling real estate and cut 14 billion francs of risk-weighted assets to boost capital to 10 percent this year, its minimum target. Analysts questioned whether Dougan’s plan will be enough. Deutsche Bank AG, Germany’s biggest bank, this week 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 Group Inc. who rates the bank neutral, said on a conference call with Dougan yesterday. “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 capitalization table?”

Chief Financial Officer David Mathers said the planned steps were “useful” measures that would improve the bank’s financial strength without diluting shareholders. The company also has shareholder authorization to sell as many as 41 million shares to pay bonuses for employees if its capital ratio is below the 10 percent requirement.

The bank said yesterday it planned to pay out about half of annual earnings as dividends to shareholders once it reaches that capital level, while aiming to increase it to 11 percent in the longer term.

Capital Ratios

“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 yesterday. “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 AG, its larger Swiss competitor and the No. 1 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.

The 54-year-old should do so, because the debt unit isn’t big enough to compete with global rivals, Kian Abouhossein, a banking analyst at JPMorgan Chase & Co. in London, said last month.

Stock Value

Chairman Urs Rohner told Neue Zuercher Zeitung in an interview published today that he ordered a review of the investment banking business that could include bigger cuts because the question is asked “time and again” by analysts and investors.

“For us, the difference between the two major Swiss banks is in the strategies,” Tim Dawson, a Geneva-based analyst at Helvea, said in a note to clients yesterday. “In our opinion that of UBS seems clearer and simpler.”

Credit Suisse stock trades at about 8.6 times estimated earnings for 2015, less than UBS, which changes hands at about 11.6 times that measure, according to data compiled by Bloomberg. That gap has widened since UBS’s decision to scale down the investment bank, which investors view as more volatile, less profitable and more capital-consuming than wealth management.

Raising Funds

Credit Suisse has declined 4 percent in Swiss trading this year, compared with UBS’s 4.1 percent increase. The cost of insuring Credit Suisse’s debt for five years rose 3.5 basis points to 65.87 yesterday, the highest this month, according to data compiled by Bloomberg.

Moody’s Investors Service lowered the outlook for the bank’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.”

Simon Adamson, a London-based analyst at CreditSights Ltd., cut his recommendation on Credit Suisse’s credit default swaps to underperform from market-perform, saying the financial impact of the settlement “should not be understated” and that the lender’s capital ratio “looks low compared with peers.”

Credit Suisse has been forced to raise funds previously. For years, Dougan said the bank was among the best-capitalized, only to be told by the Swiss National Bank in June 2012 to boost capital “substantially.” A month later, the company set out to raise 15.3 billion francs through, in part, selling notes that later converted into shares.

‘Clean Record’

Dougan and Rohner’s positions have come under pressure in Switzerland in recent weeks, with politicians and some investors calling for their resignation over the U.S. probe. Dougan said yesterday he hasn’t considered resigning, while Rohner told Swiss radio in an interview that management has “a clean record” and is taking responsibility for the case by sticking with the company.

“Management may have a clean record because misconduct started a long time ago, but they don’t look good in terms of how they handled the situation,” said Peter Stenz, a fund manager at Zurich-based Swisscanto Asset Management AG, which owns about 153 million francs of Credit Suisse shares. The executives shouldn’t take their bonuses for this year, he added.

“We will of course talk about this in the board,” Rohner said about forgoing bonuses in an interview with Swiss newspaper Blick. “Our salary systems are designed in such a way that an incident like this has repercussions,” he said.

A share sale would be well received by the market, said Andreas Brun, an analyst at Zuercher Kantonalbank.

“Credit Suisse will probably succeed in reaching 10 percent, but the question is whether that’s really enough for the market,” Brun said. “Credit Suisse has been lagging behind UBS for the past two-and-a-half years in terms of capital ratios. If they do a share sale, it may be opportune to change management at the same time and have a fresh start.”

--With assistance from Roxana Zega and Zoe Schneeweiss in Zurich.