Credit Suisse Sees Alternatives to Swiss IPO on Capital Beat

  • Thiam says bank continues to prepare for IPO in late 2017
  • Swiss bank plans to cut as many as 6,500 jobs this year

Credit Suisse CEO Thiam Says Climate Is Better for Banks

Credit Suisse Group AG signaled it is weighing alternatives to a public offering of its Swiss unit after its $5.3 billion settlement over toxic mortgage securities hurt capital buffers less than estimated. Investors cheered the change in tune.

The settlement was a “game-changer for us,” Chief Executive Officer Tidjane Thiam said in an interview with Bloomberg Television. “What it does is that it leaves us in a more comfortable position to look today at our capital planning.”

The bank, which on Tuesday posted a fourth-quarter loss of 2.35 billion francs ($2.34 billion), said it would cut as many as 6,500 jobs this year, stepping up cost reductions to boost profitability. Savings are ahead of schedule and an improved market sentiment for banks that boosted trading in the fourth quarter has continued this year, Thiam said in the interview. That may mean Credit Suisse no longer needs to sell part of the Swiss unit, according analysts and investors.

“We are pleased with how the Credit Suisse turnaround is proceeding and think the management and board of directors are correct to remain open-minded on balance sheet issues," Chief Investment Officer David Herro of Harris Associates, one of the bank’s biggest investors, said in an email Tuesday when asked about the IPO.

Herro had questioned the need for the IPO after the U.S. settlement, which ended an investigation into the role of the bank’s mortgage securities business in the 2008 financial crisis. The bank posted a fourth-quarter loss of 2.35 billion francs after setting aside 2.17 billion francs to top up legal provisions.

To read more on David Herro’s comments last month, click here

The Swiss universal bank delivered the biggest contribution to pretax profit in the fourth quarter, with 382 million francs. The CEO had previously described the plan to raise 2 billion francs to 4 billion francs through a sale of 20 percent to 30 percent of the Swiss business as a cornerstone of his turnaround strategy. On Tuesday, he repeatedly referred to it as a “backstop.”

The IPO remains “a very good option, it’s on the table, we’ve been working on it,” Thiam said in the interview. “But again, as you would expect -- that’s what we’re paid for -- we look at other options as well, continuously, and always have.”

The shares rose as much as 4.2 percent and were trading 2.8 percent higher at 5:10 p.m. in Zurich, while the Bloomberg Europe 500 Banks and Financial Services Index was up 0.9 percent.

“Scrapping the IPO could be seen as a sign of strength and I could live with both decisions,” said Thomas Braun, a portfolio manager at BWM AG, which holds about 3.7 million shares in Credit Suisse.

Capital Beat

Credit Suisse reported a common equity Tier 1 ratio, a measure of financial strength, of 11.6 percent at the end of December, down from 12 percent at the end of September. The ratio exceeded the 11.1 percent estimated in a bank survey of analysts, thanks in part to disposals of real estate and risky assets. The bank is targeting a CET1 ratio of 13 percent by the end of 2018.

With those numbers Credit Suisse no longer needs the IPO to boost its capital, according to Peter Casanova, a Zurich-based analyst at Kepler Cheuvreux who rates the stock buy. “It’s not in the interest of shareholders to sell the bank’s crown jewel.”

Like other big European lenders, Credit Suisse is reining in spending under pressure from low interest rates and rules requiring banks to hold more reserves. When Thiam announced the IPO in October 2015, Credit Suisse had a capital gap of between 9 billion francs and 11 billion francs. The bank raised tapped shareholders for about 6 billion francs later that year and has been offloading risk-weighted assets to unburden its balance sheet.

Credit Suisse’s “capital ratio is much better than expected by 50 basis points, and the January outlook statement shall be seen as a strong start,” Kian Abouhossein, an analyst with JPMorgan, said in a note. “What we think Credit Suisse needs to illustrate now is that it can generate ongoing profit and book value growth to deserve a re-rating.”

Bad Bank

Credit Suisse reduced risk-weighted assets at its so-called bad bank by 7.83 billion francs during the quarter. Such assets at the bank as a whole dropped by 2.42 billion francs, helping to support the capital ratio.

“It’s not convincing that the IPO would achieve any great benefit to the capital position of the bank,” said Ray Soudah, founder of Millenium Associates, a corporate finance advisory firm in Zurich. “They’ve now realized this and the IPO is unlikely to happen. There’s no merit to doing it, especially after the recent recovery in the share price.”

The stock, hit by a selloff last year, has rebounded since July, supported by more favorable market conditions.

“Credit Suisse stated that it will continue to assess the evolving regulatory environment to identify the best options for shareholders,” Jernej Omahen, an analyst at Goldman Sachs with a buy rating on the bank, said in a note to clients. “It is unclear to us what the possible alternatives to the IPO could be, but the market will no doubt focus on this in the immediate future.”

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