Zurich The top management of Credit Suisse (CS) around CEO Ulrich Körner is working Sunday and night shifts these days. The top management is working almost around the clock on the new corporate strategy, according to people close to the bank. At the end of October, the result of nighttime overtime is to be presented together with the figures for the third quarter. It is the second fundamentally new corporate strategy in two years – but this time it has to be right.
Anke Reingen, analyst at the investment bank RBC Capital Markets, writes in a recent study: “CS must act decisively to stabilize its business, regain its credibility and improve its returns.”
The money house is running out of time: after taking office as CEO at the end of July, Körner gave himself three months to work out the new strategy. But since then there has been a lot of speculation. Thousands of positions are up for grabs. The bank’s financing costs have increased significantly – and rumors on social media are unsettling investors. Körner is facing a series of “difficult decisions,” says analyst Reingen.
Chairman of the Board of Directors Axel Lehmann had already outlined the main features of the strategy at the end of July: The bank wants to strengthen its core business, asset management. In return, the risks in investment banking are to be significantly reduced and the cost base of the entire bank is to be reduced from CHF 16.8 billion to CHF 15 billion.
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The problem: Fresh capital is needed for the restructuring of the group – and that is difficult to obtain in the current environment. According to RBC analyst Reingen, the bank has three options. It can raise fresh equity by issuing new shares. Alternatively, she can try to earn fresh money through sales or raise the capital on her own through savings measures. The possible courses of action at a glance:
Option 1: capital increase
RBC puts the bank’s capital requirements at four to six billion francs. These could be obtained by issuing new shares. The upside: “Pre-financing the restructuring should offer more certainty, with a buffer covering the risks of litigation and regulation.” The downside, however, is that the shares of the existing shareholders would be severely diluted.
They had to cope with a minus of 60 percent since the beginning of the year alone. It is therefore unclear whether the existing shareholders would support the capital increase. The Credit Suisse share price recently reacted to rumors of an imminent capital increase with sharp downward swings. The bank had rejected corresponding media reports as “speculation”.
Credit Suisse could lure its shareholders by promising to pay out more quickly than expected, says RBC analyst Reingen. For this option, however, it is imperative that Körner’s new strategy is credible and earns the trust of shareholders.
How much capital Credit Suisse actually needs also depends on the operational performance of the bank. In the first half of the year, the loss had already totaled 1.9 billion Swiss francs (around 1.8 billion euros). The rating agency Moody’s expects the losses for the year as a whole to amount to three billion francs.
>> Read here: Credit Suisse should accelerate its schedule
Andreas Meyer, founder and fund manager at the independent asset manager Fountain Square in Hamburg, is more pessimistic: “You can expect a loss of over four billion for 2022,” he says. In this case, the equity ratio could fall to around twelve percent. “That wouldn’t be nice, but it’s still far from the minimum requirements of the financial regulator Finma.”
Option 2: Refurbishment from your own resources
When chief supervisor Lehmann presented the cornerstones of a newly formed Credit Suisse at the end of July, the manager was still optimistic that the bank would be able to carry out the restructuring largely on its own. “Our bank is undoubtedly facing a major transformation,” said Lehmann. The investment bank should be transformed into a “capital-friendly, advice-oriented banking business and a more focused market business”.
The idea behind it: For some risky business areas in the investment bank, Credit Suisse has to deposit a large amount of equity as security due to regulatory requirements. If the bank scales back these transactions or exits them entirely, the capital released could be used for restructuring on the one hand, and directed towards lower-risk asset management on the other.
>> Read here: Credit Suisse – What’s really behind the record low
According to RBC analyst Reingen, this option also has a disadvantage: it rarely worked in the past. “Earlier examples of restructuring show that concerns about capitalization act as headwinds.” In addition, Credit Suisse’s financing costs have risen sharply.
The premiums for so-called credit default swaps (CDS), which investors use to insure themselves against the default of Credit Suisse bonds, recently climbed to an all-time high. The competitiveness of the investment bank suffers as a result. “A deterioration in perceived creditworthiness has a direct impact on profitability,” emphasizes Reingen.
Option 3: Sale of parts of the business
One thing is already clear: the restructuring of CS will hardly succeed without the sale of assets. Credit Suisse put part of its securitized products business up for sale at the end of July. RBC expects the bank could sell a 40 percent minority stake to an outside investor. This would put the bank in a position to take in just over CHF 1 billion and raise the equity ratio by around 0.40 percentage points.
on edge
13.5
percent
is the core capital ratio of Credit Suisse.
The problem, according to fund manager Meyer: “The last person on the market has now understood that Credit Suisse has to sell, which has a negative effect on the price.” In addition, the bank would have to permanently share the income from the profitable division with the external investor .
>> Read here: Credit Suisse moves forward with asset sales
As the Bloomberg news agency reported on Thursday, citing insiders, the money house is also considering looking for an external investor for the investment bank’s advisory business. According to RBC, an IPO for the Swiss universal bank would also be a way to generate capital. The institute had already considered such an option in 2015, but ultimately rejected it. RBC calculates that an IPO of a 25 percent stake in the Swiss business could bring in CHF 2.4 billion.
In addition, there are always rumors that CS could sell the business with professional investors (asset management). “Divestments could support the strategic changes with a less dilutive effect,” says RBC expert Reingen. However, the implementation of sales is tedious – and time is the scarcest commodity at Credit Suisse.
More: Credit default insurance for Credit Suisse rises in price to a record high – the share slips to a record low.