Credit Suisse Urged by Central Bank to Boost Capital
Credit Suisse Group AG (CSGN) needs a “marked increase” in capital this year to prepare the bank for a possible worsening of Europe’s sovereign-debt crisis, the Swiss central bank said. The shares fell as much as 11 percent.
“For Credit Suisse, given the low starting point and the risks in the environment, it is essential that it already substantially expand its loss-absorbing capital base during the current year,” the Swiss National Bank said in its annual financial stability report today. The central bank, which also recommended UBS AG (UBSN) boost capital, said improvements can be achieved by suspending dividend payments or selling new shares in addition to the banks’ plans for cutting assets.
This is the first time since the SNB began publishing the financial stability report in 2003 that it singled out Credit Suisse as needing a bigger improvement in capital than UBS and putting a timeframe on its recommendation. To assess the banks’ capital adequacy, the SNB is evaluating risks from a “very severe but possible scenario” of a worsening sovereign-debt crisis. Potential losses for the two banks in such a situation would be “substantial,” the central bank said.
“Credit Suisse’s over-optimism on organic earnings means they are now at the low end of all global wholesale banks on a Basel III basis,” said Huw van Steenis, a London-based analyst at Morgan Stanley with an “equal-weight” rating on the bank. To boost capital ratios the bank is likely to shed “far more” risk-weighted assets at the investment bank, as suspending dividend “would not be substantial enough in the adverse scenario.”
Credit Suisse, the second-largest Swiss bank, fell 1.96 Swiss francs, or 10 percent, to 17.04 francs by 2:01 p.m. in Zurich trading, the most since December 2008. UBS, Switzerland’s biggest bank, declined as much as 4.8 percent, and was 2 percent lower at 10.93 francs.
“It’s up to the management of Credit Suisse to respond to our encouragement,” SNB Vice President Jean-Pierre Danthine said at a press conference in Bern today when asked about the drop in the share price. “Credit Suisse’s plan corresponds to our assessment, but we’d like to see acceleration.”
The SNB’s stress scenario assumes that the euro area falls into a “deep recession,” which spreads to other European countries including Switzerland and to the U.S. This could be triggered by a disorderly default of several smaller peripheral countries in the euro area, the central bank said.
“Without a doubt we were negatively surprised by the speed with which the SNB wants to see Credit Suisse reduce its capital deficit,” Derek de Vries, a London-based analyst at Bank of America Merrill Lynch, said in a note. “We can only assume that the worsening macro environment has caused a heightened sense of urgency among Swiss policy makers. This is undeniably negative news and increases the probability of a capital increase.”
Credit Suisse’s loss-absorbing capital, comprised of common equity and contingent capital that converts to equity at a 7 percent trigger, amounted to about 5.9 percent of risk-weighted assets under Basel III rules at the end of March, the SNB said. That ratio stood at 7.5 percent for UBS, it said. By 2019, both banks need to boost these ratios to at least 13 percent.
“When measured according to the new Basel III regulations, the capitalization of the Swiss big banks -- in particular Credit Suisse -- is below average for international big banks,” the SNB said in the report. “An above-average capitalization level would be appropriate, given the importance of the big banks for the Swiss economy and for financial stability.”
The central bank didn’t identify the group of international lenders it used for comparison, or their average level of capitalization.
“We conclude that Credit Suisse will be forced to raise substantial amounts of dilutive common equity by the SNB,” Andrew Lim, a London-based analyst at Espirito Santo Investment Bank with a “sell” rating on the stock said in a note. UBS will probably be able to boost its common equity ratio to 8.9 percent at the end of this year and to 12.7 percent at the end of 2013, he estimated.
Credit Suisse would need an additional 4 billion francs to 5 billion francs in capital to get above a 7.5 percent ratio and close the gap with UBS or cut more assets, de Vries estimated. The bank may generate about 2 billion francs through earnings between the end of March and end of the year, he said.
Credit Suisse “has been at the forefront” in adapting to regulatory change and attaches “highest priority to an industry-leading capitalization,” the Zurich-based lender said in a statement today. The bank “has also established transparency on its plan for both building up common equity through retaining earnings and further asset reduction,” Credit Suisse said.
The Swiss government and the central bank had to prop up UBS in 2008 by letting it spin off risky assets into an SNB fund. UBS’s writedowns and losses from the credit crisis totaled more than $57 billion, according to data compiled by Bloomberg. UBS’s losses amounted to more than 3 percent of its net balance sheet total, the SNB said, while loss-absorbing capital made up about 1.7 percent of total assets at Credit Suisse and 2.7 percent at UBS at the end of March.
UBS “has built its capital base faster than any of its peers over the past two years,” the Zurich-based bank said in a statement today. “Our current strategy is designed to ensure we continue to build on our already industry leading capital position,” UBS said.
Both banks have said they plan to boost capital ratios by retaining earnings and cutting risk-weighted assets. The SNB said today UBS should continue with its plan, including in particular a policy of dividend restraint, while Credit Suisse needs to “accelerate” its capital build-up.
UBS, which hasn’t paid a cash dividend since 2007 as it sought to rebuild capital after losses, paid shareholders 10 centimes a share this year. Credit Suisse has had a dividend every year since the bank was founded in 1856, Chairman Urs Rohner told shareholders at the annual meeting in April. Credit Suisse paid a dividend of 75 centimes a share in May, while investors chose to receive 48 percent of the payments in shares instead of cash.
“Paying a dividend this year may not have been such a good idea for Credit Suisse,” said Dirk Becker, a Frankfurt-based analyst at Kepler Capital Markets who has a “reduce” rating on the bank. “Credit Suisse may not be able to pay a dividend for 2012. But I think forcing it now to sell shares is neither a good idea nor is needed.”
The central bank also recommended that the banks improve transparency on capital by publishing Basel III capital ratios and risk-weighted assets according to internal models as well as according to the Basel standardized approach every quarter.
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