Credit Suisse Plans $15.6 Billion Capital Increase
Credit Suisse Group AG (CSGN) Chief Executive Officer Brady Dougan succumbed to pressure from the central bank and senior executives within his firm to increase capital by 15.3 billion francs ($15.6 billion).
The lender will also cut an additional 1 billion francs in costs by the end of 2013, the Zurich-based bank said in a statement today. Second-quarter net income rose 2.6 percent to 788 million francs from a year earlier, the company said. Credit Suisse shares rose as much as 6.8 percent.
Dougan, 52, said the measures will almost double the bank’s capital ratio from levels at the end of March, which the Swiss National Bank said required a “marked increase.” While Dougan led Credit Suisse through the 2008 financial crisis without state aid, he faced mounting public criticism and internal dissent after the shares of Switzerland’s second-biggest bank slumped to a 20-year low following the SNB’s June 14 comments.
“Brady has bitten the bullet today and these capital measures are welcome, but they’re rather late,” said Christopher Wheeler, a London-based analyst at Mediobanca SpA, who has a neutral rating on the stock. “He was the CEO of a bank at the end of the second quarter 2009 that was seen as a crisis winner. And yet profitability and capital weren’t dealt with promptly enough.”
Credit Suisse rose 4.4 percent to 17.89 francs by 3:21 p.m. in Zurich trading, paring gains from earlier today, which were the highest in six months. The stock, which is down 19 percent so far this year, slumped more than 10 percent on June 14 follow the central bank’s comments in its annual financial stability report. The 38-company Bloomberg Europe Banks and Financial Services Index is down 3.1 percent this year.
Dougan said today’s actions should remove any doubts raised by the SNB’s report.
“This is a robust and balanced set of capital initiatives, close to 80 percent of which are non-dilutive,” he said in a statement. “Over the past five years and prior to these measures, we have maintained one of the strongest capital levels in the industry with minimal dilution to our shareholders.”
The bank expects a Basel III capital ratio of 10.8 percent by the end of the year, compared with 5.9 percent the SNB cited in its financial stability report in June, it said. The capital ratio includes common equity, contingent convertible bonds and the partial use of participation securities, called Claudius notes, Credit Suisse said. The capital ratio for UBS AG, the biggest Swiss bank, was 7.5 percent at the end of March, according to the SNB report.
“The problem of the two large Swiss banks is that the regulatory pressure is enormously high,” said Dirk Becker, a Frankfurt-based analyst at Kepler Capital Markets who has a “reduce” rating on Credit Suisse. “They will be forced to hold enormous amounts of capital, which will make it impossible for them to achieve reasonable returns.”
The measures announced today may lead to dilution of about 15 percent based on “back-of-the-envelope calculations,” JPMorgan Chase & Co. analysts Kian Abouhossein and Amit Ranjan said in a note.
Dougan, who said after the SNB report that he didn’t plan to increase capital, was urged by some employees to reconsider and put an end to questions about the firm’s capital strength, four senior managers said in interviews last month.
“Concerns in the market about Credit Suisse’s capital position should take the back seat” now, Andreas Venditti, an analyst at Zuercher Kantonalbank AG with a market perform rating on the stock, wrote in a note. “It’s positive in our view.”
The bank will increase capital by 8.7 billion francs immediately, partly by selling notes that convert into 234 million shares in March at the price of 16.29 francs a share. The notes may convert earlier if the bank’s core capital ratio falls below 7 percent.
Half of the notes, carrying a 4 percent coupon, will be bought by the strategic investors, including Qatar Holding LLC, Olayan Group, Norges Bank Investment Management, BlackRock Investment Management, Capital Research Global Investors and Temasek Holdings Pte Ltd., and the remainder will be offered to Credit Suisse shareholders. Strategic investors will buy any notes not taken up by other shareholders.
Credit Suisse also reached an agreement with Olayan Group to accelerate the issuance of 1.7 billion francs of contingent convertible notes, which was planned for October 2013, to the end of this month. The remaining 4.1 billion francs of the notes will be sold to Qatar Investment Authority as planned next year. The bank would have been “happy” to accelerate issuance of the notes to Qatar, though the “very supportive” investor had other considerations, Dougan said on a conference call.
“The Olayan Group strongly believes that in this challenging environment the Credit Suisse model is capable of creating sustained value,” the Saudi Arabian group said in a statement distributed by the bank.
Credit Suisse plans to boost capital by an additional 6.6 billion francs by the end of the year, including raising 1.6 billion francs from selling real estate and parts of its asset management business.
It will offer employees the chance to buy shares in exchange for so-called Adjustable Performance Plan Awards, known as APPAs, which are tied to the bank’s return on equity and were issued as compensation in prior years. This may boost capital by 750 million francs, Credit Suisse said.
The capital-raising plans will strengthen Credit Suisse’s ability to absorb losses and “substantially increase” the bank’s resilience, the Swiss central bank said today.
The bank is also further reducing costs after last year announcing plans to cut 3,500 jobs and lower expenses by 2 billion francs. Dougan declined to provide details on whether new cost-cutting measures would result in job losses.
Credit Suisse aims to cut costs at the investment bank by about 550 million francs, and by about 450 million francs at the private bank. About half of those savings will come from more efficient use of shared services such as information technology, the bank said.
The bank plans to “rationalize” the securities unit’s advisory and underwriting businesses to bring them “in line with market environment,” get rid of duplications between country, product and industry teams, and consolidate execution into hubs in the U.K. and Hong Kong. The investment bank in Asia Pacific will focus on the largest markets with a “distinct competitive advantage,” it said. In private banking, Credit Suisse will streamline support functions.
“Brady Dougan still thinks he can remain one of the bulge bracket firms in investment banking. This is very, very difficult,” said Becker of Kepler, citing the need to give up capital-intensive products. “The investment bank will look much smaller for UBS and Credit Suisse than both banks currently believe.”
The investment bank reported pretax profit of 383 million francs for the second quarter compared with 208 million francs in the year-earlier period. The result is “better than consensus on higher revenues,” JPMorgan analysts said in the note. Earnings in private banking and asset management fell 7 percent to 775 million francs and 37 percent to 133 million francs, respectively.
Dougan said the bank is committed to dividends for shareholders. Credit Suisse is accruing for an unchanged payout for 2012 of 75 centimes per share, which will be fully distributed in new stock, the bank said.
Credit Suisse reiterated its return-on-equity target of 15 percent, which compares with the 9.2 percent reported for the second quarter.
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