Credit Suisse CFO Sees Bank's Growth Slowing Capital Build

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  • Bank still has flexibility, options to Swiss IPO, Mathers says
  • Capital increase would need ‘strong and clear justification’

David Mathers. Photographer: Chris Ratcliffe/Bloomberg

Credit Suisse Group AG’s push to expand in some areas of trading and across its wealth management businesses will make it harder to build up capital buffers at the same pace as last year, Chief Financial Officer David Mathers said.

After selling billions in unwanted assets last year, the bank entered 2017 with a bigger capital ratio than analysts expected, even though the year ended in a loss stemming in large part from a $5.3 billion legal settlement. Improving on the capital performance this year presents a challenge because Credit Suisse has fewer assets to offload at a time when some businesses need more reserves to backstop growth, Mathers said in an interview in Zurich.

Those include the trading unit, which may take on more risk this year to benefit from the “buoyant” U.S. market, he said.

Credit Suisse is examining a broad range of options for achieving its capital goals, he said. While preparations remain on track for selling part of its Swiss business in an initial public offering this year to raise as much as $4 billion francs, the bank has said it is exploring a broad range of alternatives. The bank had a common equity Tier 1 ratio of 11.6 percent, up from 11.4 percent at the start of 2016, and is targeting a CET1 ratio of above 13 percent after 2018.

The bigger buffer “gives us flexibility,” the CFO said an in interview in Zurich. Thanks to the progress on capital, “we can decide if and when the IPO can be done.”

Bad Bank

Mathers, 51, wears two hats at Credit Suisse. Besides overseeing its finances, he’s responsible for shrinking its strategic resolution unit, a dumping ground for assets that no longer fit company strategy. Under pressure from stricter post-crisis rules, Chief Executive Officer Tidjane Thiam has scaled back in investment banking to free up capital for expanding in wealth management.

While other executives spent last year investing in new assets, Mathers had the less glorious task of ditching old ones. That included finding buyers for complicated investment banking products and risky loans that don’t justify the reserves required to cover potential losses.

The resolution unit still houses $44 billion of risk-weighted assets after releasing $29 billion last year, exceeding its target by about $11 billion, Mathers said. About half the remaining risk is operational and can’t be wound down by selling off securities because it reflects potential lawsuits or the danger of systems malfunctioning.

“The amount of capital Credit Suisse can actually release from the SRU remains important but will be declining as the remaining asset balance reduces,” the CFO said. “Clearly, that is a nice problem to have.”

Global markets, the trading unit where surprise losses threw the bank into turmoil a year ago, is close to the lower end of its targeted range for risk and is unlikely to be a source of further reduction in risk-weighted assets, Mathers said. Trading has been strong both in global markets and in the advisory business, which is part of the investment banking and capital markets unit.

“Credit Suisse needs to build capital for growth, for regulatory headwinds and to resume normal service of cash dividends,” said Kinner Lakhani, a London-based analyst at Deutsche Bank who rates the stock hold. “But the bank has options and a relatively strong start to the year may provide an opportunity to ‎exercise one of these options.”

Mathers also expects risk to increase in the Swiss business, in international wealth management and in Asian private banking as the bank continues to open its pockets to ultra-rich clients. Net interest income from lending activity rose 26 percent in the international wealth management division, 16 percent in Asia-Pacific and 8 percent in Switzerland last year, he said.

Credit Suisse has also committed $600 million in capital to expand its business in Saudi Arabia, where an application for a full banking license is pending, people familiar with the matter have said. Mathers didn’t comment on the matter.

“Credit Suisse still doesn’t have too much capital,” said Daniel Regli, an analyst at MainFirst in Zurich who does not yet have a rating on the bank. “They certainly need to decide wisely where to put it to work.”

The SRU unwound 191,000 external derivative trades last year. Assets offloaded include a credit default swap portfolio -- insurance contracts that pay out if a borrower defaults -- sold to Citigroup Inc. and $3.1 billion in loans acquired by a U.K. pension plan.

Analysts at UBS Group AG led by Daniele Brupbacher said last month that a share sale by Credit Suisse itself could be an alternative as the bank’s stock has recovered from a record low last July. Shares have gained more than 50 percent since then, giving the bank a market value of about 33 billion francs ($32.6 billion).

The bank would need a “strong and clear justification” to tap shareholders when the feedback is for just the opposite, Mathers said. People are saying, “you guys can now take your time and you’re not under pressure. And I think that’s true.”