Dougan Doubts Mount Inside Credit Suisse as Stock Slides

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Dougan Doubts Mount at Credit Suisse as Stock Hits 1992 Low
Brady Dougan, chief executive officer of Credit Suisse Group AG, during an interview in Zurich. Photographer: Gianluca Colla/Bloomberg

Credit Suisse Group AG Chief Executive Officer Brady Dougan, caught off guard last week when the Swiss central bank said he must raise capital faster, faces mounting public criticism and dissent from employees.

A memo to staff and a call with managing directors did little to assuage concerns about the bank’s slumping share price, which hit a 20-year low on June 14, according to people familiar with the matter who asked not to be named because they aren’t authorized to speak publicly. Some employees, disagreeing with Dougan, favor selling new stock even at current levels to put an end to questions about the firm’s capital strength, four senior managers said in interviews this week.

Dougan, who for years has been calling his bank one of the best-capitalized in the world, led Credit Suisse through the 2008 financial crisis without direct state aid, even as its bigger competitor, UBS AG, got a government bailout. Four years later, Dougan’s bank faces public criticism reminiscent of UBS during the last crisis amid uncertainty over capital and a U.S. criminal investigation into alleged tax evasion by some American clients. Credit Suisse dropped 18 percent this year through yesterday, while UBS climbed 2 percent. Credit Suisse was unchanged at 18.18 francs by 4:52 p.m. in Zurich today.

“He’s obviously under a lot of pressure,” said Christopher Wheeler, a London-based analyst at Mediobanca SpA who has a neutral rating on Credit Suisse. “Their capital position looks tenuous. Their profitability is tenuous. It feels like the board may start thinking: ‘Do we need a fresh pair of eyes running this bank at this point in time because something has lost momentum?’”

Board Backing

The bank’s board, which is meeting this week, hasn’t publicly commented on Dougan, 52, who has been CEO since May 2007. It has backed him privately, even as the shares slid this year, according to a person familiar with the board’s thinking who asked not to be named because the discussions are private.

The board includes representatives from the bank’s two biggest shareholders, Olayan Group of Saudi Arabia and sovereign-wealth fund Qatar Holding LLC, which participated in Credit Suisse’s 10 billion-franc ($10.6 billion) capital increase in October 2008, as UBS got a state bailout. Koor Industries Ltd., a Tel Aviv-based company that also helped the lender raise capital, said in an e-mail that it’s “very confident in the bank’s management and performance.”

Slumping Shares

Credit Suisse is the only one among its biggest global competitors with a stock trading below levels of the 2008 financial crisis. Of 42 analysts who follow the Zurich-based bank and are tracked by Bloomberg, 29 percent recommend investors buy the shares, the lowest percentage since 2004.

Some employees at Credit Suisse, Switzerland’s second-largest lender, are more persuaded by the company’s slumping stock price that something needs to change than they are by management arguments that the current path is appropriate, according to one senior executive. Bankers have begun sending suggestions directly to senior management, according to another executive, who asked not to be identified.

Last week, in response to a Swiss National Bank report that said Credit Suisse needs to “substantially” expand its capital base this year, the company said it is “one of the best capitalized” globally and exceeds current Swiss requirements. A capital increase isn’t planned, SonntagsZeitung reported June 17, citing an interview with Dougan.

Dougan Disappointed

The CEO told the newspaper he was “disappointed” by the SNB report and that he had no warning from central bank governing board members Thomas Jordan and Jean-Pierre Danthine at a 90-minute lunch meeting 10 days before its publication. Credit Suisse declined to comment or make executives available for this article.

The SNB, which said Credit Suisse’s capital is below the average for international big banks, didn’t say how much the company needs to raise this year or identify the average level for competitors it used for comparison. The central bank said it applied stricter Basel III rules, which won’t be fully implemented until 2019, to its calculations of capital strength. It also used a stress scenario that includes disorderly defaults of several peripheral euro-area countries and a “deep recession” in Europe, Switzerland and the U.S.

Credit Suisse’s common equity and contingent convertible bonds, known as CoCos, amounted to about 5.9 percent of risk-weighted assets under Basel III at the end of March, the central bank said. That ratio stood at 7.5 percent for UBS, it said. Had the SNB included CoCos to be issued next year in its calculations, Credit Suisse’s capital ratio would have been 7.9 percent, Dougan told SonntagsZeitung. CoCos convert into shares when the bank’s capital ratio falls below a predefined level.

Finma Supervision

Dougan also said the Swiss Financial Market Supervisory Authority, or Finma, is Credit Suisse’s primary regulator rather than the SNB, according to SonntagsZeitung.

Credit Suisse employees are angry at the SNB for the way the central bank publicly communicated its concerns, which are worrying some clients, a senior manager at the bank said. Jordan in an interview on Swiss television last week called the reaction in Credit Suisse’s share price to the SNB report a “total exaggeration,” and the central bank said it will review communications procedures.

Finma is closely supervising the banks’ plans to build up capital, which needs to be boosted in quantity and quality to meet Basel III and Swiss too-big-to-fail requirements, Christina Buergi, a spokeswoman for the regulator, said by phone. She said Finma wouldn’t comment on the content of the SNB financial stability report. Silvia Oppliger, a spokeswoman for the SNB in Zurich, declined to comment about Dougan’s statements.

Dividend Cut

Dougan could cut or scrap the dividend, the most probable option for responding to the SNB’s request, according to responses from eight analysts compiled by Bloomberg from research notes and interviews.

Credit Suisse has paid a dividend every year since the bank was founded in 1856, Chairman Urs Rohner told shareholders at the annual meeting in April. The bank cut the 2011 payout for shareholders to 75 centimes a share from 1.30 francs for the previous year and let investors choose whether they want to receive stock instead of cash to help it boost capital.

Scrapping the dividend may not give Credit Suisse a “substantial” enough boost in capital, according to Huw van Steenis, a London-based analyst at Morgan Stanley.

Credit Suisse may have net income of 2.46 billion francs this year, according to the mean estimate of 17 analysts surveyed by Bloomberg. That’s down 63 percent from estimates a year ago. Net income for 2011 was 1.95 billion francs.

‘Demotivated’ Staff

Van Steenis and Kian Abouhossein, an analyst at JPMorgan Chase & Co. in London, said Credit Suisse may have to dispose of more assets at the investment bank than already planned to boost ratios. The bank could cut 50 billion francs to 70 billion francs in additional risk-weighted assets at the investment bank and still have a big enough business to support its private bank, Abouhossein said in a note last week.

Such prospects are worrisome for employees concerned that they’ll lose their jobs or see their pay shrink. Senior managers said they expect more staff cuts than the 3,500 announced last year because the market environment isn’t improving amid a continuing European sovereign-debt crisis. Credit Suisse trimmed its 2011 bonus pool by 41 percent after the securities unit posted a second consecutive quarterly loss. The bank reduced Dougan’s total pay by 55 percent.

John Purcell, founder of London-based executive-search firm Purcell & Co., said staff is “demotivated” and complains about “pay and a lack of vision at the management level.”

Accelerating CoCos

Dougan, who joined Credit Suisse First Boston in 1990, headed the investment bank before taking over as CEO five years ago. He had added about 2,000 people to the securities unit since 2009 -- a move he called wrong in retrospect -- before announcing last year’s job cuts. The headcount at the investment bank at the end of last year was 12 percent higher than at the end of 2006, while the unit’s 2011 net revenue was 44 percent lower than five years earlier.

Given that reorganization takes time and it may be difficult to cut more assets, analysts including Mediobanca’s Wheeler and Andrew Lim from Espirito Santo Investment Bank forecast Credit Suisse will have to sell new shares. Kinner Lakhani, an analyst at Citigroup Inc. in London, said acceleration of the issuance of CoCos from October 2013, even with potential penalty costs, could be a quick way to increase capital to a level comparable with UBS’s.

‘Slow Deterioration’

Olayan Group and Qatar Holding could be persuaded to have the hybrid bank debt they hold converted into CoCos earlier than next year, said one senior Credit Suisse employee. Another option would be to issue new equity to senior employees in exchange for so-called Adjustable Performance Plan Awards, known as APPAs, that are tied to the bank’s return on equity and were issued as compensation in prior years, the employee said.

Capital isn’t the only issue pressuring Dougan and Credit Suisse management. The firm failed to solidify the position its investment bank won during the financial crisis, when competitors were sidelined, and has been slow to react to a worsening private-banking environment, analysts and investors said. Investment-banking revenue accounted for 42 percent of the company’s total last year compared with 53 percent in 2010.

“The slow deterioration in operational performance, the heavily lagging share price and the lack of any vision on how to tackle the current problems are the main investor complaints,” said Florian Esterer, a fund manager at MainFirst Schweiz AG in Zurich, who doesn’t own Credit Suisse shares. “The pressure is building.”

Unresolved Questions

Credit Suisse started revamping its wealth-management unit after Hans-Ulrich Meister took over the business in August. Before then the bank characterized falling margins as a cyclical fluctuation rather than a structural industry change. The bank, whose cross-border wealth-management business Dougan had called “state-of-the-art compliant,” announced in July that it was a target of a U.S. Justice Department criminal investigation into alleged tax evasion by American clients.

Dougan has said Credit Suisse is doing “everything we can” to resolve the matter for the past 11 months. Still, as the Swiss government seeks what it calls a “global solution” with the U.S. involving all banks, there has been little progress to show to investors and clients.

Wealth management’s net new money in the first quarter, which is usually stronger than the rest of the year, amounted to 5.8 billion francs, compared with the 10.4 billion-franc average of the past eight quarters. Unresolved questions about tax issues between Switzerland, the U.S. and Western European countries are “making clients insecure and are also putting pressure on the share price,” Meister said in an interview with Finanz und Wirtschaft newspaper this month.

‘Lame Duck’

Dougan’s U.S. citizenship and investment-banking background are thorns for local media and the public, which have called for the firm to return to its Swiss private-banking roots.

Bilanz, a Swiss business magazine, in a March article questioned Dougan’s allegiances, saying he couldn’t recall the number of members in the Federal Council in an interview and hasn’t learned any German. Free tabloid 20 Minuten last week carried an article that called Dougan a “lame duck” and reminded readers about 71 million francs in shares he received in 2010 under an incentive program created five years earlier.

Even people on the street have an opinion about his tenure.

“Dougan surely doesn’t have a lot of leeway,” said Beat Menzi, a 48-year-old bike-rickshaw driver on Zurich’s Bahnhofstrasse. “I would like to see more Swiss people in the top positions of our banks.”

Same Choices

A new CEO, Swiss or not, will face the same hard choices of cutting assets and jobs and raising capital, and Credit Suisse lacks any obvious internal candidates for the role.

For investors who have stood by Dougan and bought Credit Suisse shares as they slid, the results have been painful.

“We are very supportive of Dougan and the management team,” David Herro, chief investment officer at Harris Associates LP in Chicago and Credit Suisse’s third-largest shareholder with a 3.3 percent stake, said in an e-mail.

In the nine months ended in March, he more than doubled the number of shares Harris Associates holds, according to data compiled by Bloomberg. Since then the stake has lost 316 million francs in value.

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