April 27, 2017

Alpine hike

by Breakingviews.

Tidjane Thiam’s plan to raise new capital isn’t the Credit Suisse boss’s first U-turn. Compared with other big reversals – like his decision in 2016 to dump securitised products and leave investors nursing big losses – this is, at least, the good kind.

Raising 4 billion Swiss francs ($4 billion) via a rights issue replaces an earlier plan to list the bank’s Swiss arm. After the deed is done, Credit Suisse’s equity will be 3.8 percent of total assets, above its 3.5 percent target, bringing it closer to peers. Markets are more relaxed than they were about the imminent outcome of French presidential elections, and listing the Swiss bank might have brought complexities, like having to hold more capital in the newly listed bit.

Thiam is also raising capital from the front foot. Credit Suisse beat analyst estimates with its first-quarter earnings. Private banking assets under management grew, and global markets revenue increased 29 percent year on year. Investors were braced for something like this already: Credit Suisse shares have traded at a fifth less than book value.

Raising capital might come at the expense of returns. Credit Suisse only makes a 6.5 percent return on tangible equity, way below its cost of equity of at least 10 percent. To generate an 11 percent return by 2019, Credit Suisse would have to grow its revenue from the current level implied by the first quarter by 2 percent a year, and meet its target of cutting costs to less than 17 billion Swiss francs. That doesn’t sit easily with the bank’s own cautious outlook for the near term, and falling gross margins in private banking outside of Asia.

Greater capital clarity should soothe investors, especially after Credit Suisse rubbed them up the wrong way with a plan to over-generously remunerate its executives. That led to another U-turn earlier this month. Responding to changing circumstances is understandable, but repeatedly saying one thing and doing another isn’t.



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