Political Dividend

Credit Suisse Should Give Thanks for Emmanuel Macron

Rights issue is sensible, but delivery must be pretty perfect.

Credit Suisse's Tidjane Thiam should doff his cap to Emmanuel Macron, the 39-year-old ex-Rothschild banker on track to win the French presidency. Macron's first-round win on Sunday and expected victory in the May run-off -- which has lightened the mood in European markets -- should allow the Swiss bank to seal a $4 billion rights issue and avoid selling off part of its lucrative domestic unit to bolster its finances.

Shareholder Friendly

Quarterly performance, capital hike and cash dividends help Credit Suisse shares

Source: Bloomberg

Intraday times are displayed in ET.

Yet Thiam's promise in a Bloomberg TV interview that "this should be it" in terms of capital hikes downplays the mixed outlook for Credit Suisse Group AG. While it is profiting from a bump in markets trading, it's having to restructure in Asia and faces headwinds in wealth management.

The prospect of a cash dividend -- amounting to about $1.7 billion, not that far shy of half the rights issue -- helped lift the bank's shares by 2.5 percent on Wednesday. But it leaves little financial wriggle room if things don't go to plan.

A $4 billion fund-raising, smack bang in the middle of market expectations, certainly looks sensible. It would take the bank out of the danger zone in terms of capital strength versus the competition, with the core capital ratio expected to rise to 13.4 percent -- on par with UBS AG. And it means Thiam won't have to sell part of his domestic Swiss business, the bank's most profitable division in the first quarter.

Capital Jump

Proposed $4bln rights issue would bump Credit Suisse up the capital ratio ranking

Source: Company filings, Bloomberg Intelligence

NB: All figures are end-2016 besides Credit Suisse post-increase estimate

Whether this is enough to fully put capital issues to bed depends greatly on the economy and Thiam delivering on promises to cut cost while lifting revenue. He did exactly that in the first three months of the year, with adjusted net revenues rising 18 percent and non-compensation costs falling 15 percent. The Global Markets unit benefited from the fixed-income rebound that helped many U.S. banks, with its net revenue jumping 29 percent even with a smaller balance sheet. That's reassuring.

But it's still tough to judge the reliability of Credit Suisse earnings as it emerges from two years of straight losses. Its Asia markets unit posted a pretax quarterly loss. Gross margins in private banking fell about 2 basis points quarter-on-quarter, according to Bernstein analysts. As for the trading environment, Credit Suisse warned of client volumes suffering from "political uncertainties" in April. "We remain cautious," it said. Rivals such as Deutsche Bank AG are raising capital too. Wall Street banks are grabbing market share.

Rocky Road

Credit Suisse is only just emerging from a painful string of quarterly losses

Source: Company filings

Given that Credit Suisse wants to paint itself as a shareholder-friendly bank with a 13 percent capital ratio and a promise to potentially return as much as $1.7 billion in cash dividends, there's barely any room for error. The bank is shedding thousands of jobs as it targets another 1 billion Swiss francs in cost cuts, yet it must keep lifting revenue. Its shares are trading at a 22 percent discount to book value, better than Deutsche Bank and Barclays Plc but still a long way from UBS.

With investor relations strained by a squabble over executive pay, Thiam's bold assertion that he won't be back for more funds is another pledge he cannot afford to break.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Lionel Laurent in London at llaurent2@bloomberg.net

    To contact the editor responsible for this story:
    James Boxell at jboxell@bloomberg.net

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