The Swiss bank won plaudits for amping up cost cuts and lowering profit targets this week. It went largely unnoticed that Credit Suisse is tinkering elsewhere, raising troubling questions.
Tidjane Thiam had to walk back on previous guidance, the second time he has done so in his nearly 18 months at Credit Suisse. Investors took the move favorably, sending the bank’s stock higher – in part because of another 1 billion Swiss francs in cost cuts that Thiam has pledged.
The fact that the bank also quietly trimmed its capital targets went largely unremarked upon. These changes are hugely relevant, according to Jeremy Sigee, a veteran banking expert who analyzes Credit Suisse stock for Barclays.
Target Lowered
Credit Suisse has until now targeted a Common Equity Tier 1 ratio of 13 percent, but quietly reduced the target to between 12 percent and 13 percent, Sigee wrote. Credit Suisse boasted having reached 12 percent at the investor event on Wednesday – effectively, it has already reached its target.
That’s not all: while the previous target left room for further legal risks and other unforeseen setbacks, the new range leaves little leeway – it has been calculated «pre-significant litigation,» as Barclays notes.
Fines Expected
That is remarkable considering the penalties and fines expected to wash over Credit Suisse in coming months. Settlements for misbehavior in connection with residential mortgage-backed securities alone could cost Credit Suisse several billion Swiss francs, as finews.com has previously reported.
To be sure, rivals including UBS face similar cash calls for past misbehavior in selling RMBS, but Switzerland’s largest bank has a far larger cushion of capital available to shield it from a massive fine.
Credit Suisse Relaxed on Basel IV
Sigee also expects Credit Suisse’s risk-weighted assets, or RWAs, to burden the bank under what is expected to be a new installment of international capital rules, dubbed Basel IV. This would also eat into Credit Suisse’s capital base.
The bank’s management was sanguine on Wednesday about the impact, and isn't expecting an introduction of the new capital regime until 2021.
This would seem a cavalier attitude considering Credit Suisse’s recent past: it was only four years ago that Switzerland’s central bank alarmed Credit Suisse investors by calling for the bank to stop paying dividends and bolster its depleted capital instead.
Less IPO Money?
The planned initial public offering of Credit Suisse’s Swiss subsidiary could also throw a spanner in the works for the parent bank’s capital-building. This week, the bank was mum on how much capital would have to be shifted to the Swiss unit ahead of a planned partial listing in the second half of 2017.
But management made clear that the Swiss unit would actually need a proportionally larger cushion than the Swiss universal bank it has been operating as until now, according to Barclays.
This would hit Credit Suisse’s return-on-equity and, in turn, the valuation of the Swiss unit, potentially a major blow for Thiam, who needs the proceeds from the strategic move to bolster capital. Even if Credit Suisse eked out more room for itself by lowering its target, the bank may face a reckoning on several fronts over its capital.
