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Thursday, 24 April 2014

CS: Do market uncertainty, shareholder dilution outweigh better solvency?

Like most bank shares, Credit Suisse has been trading in a fairly lacklustre manner of late. CS stock was trading around SFr17.17 in today’s mid-afternoon session, admittedly on slightly better volume than of late, but still way off the SFr26.21 they hit in March – the high for the past year – and only marginally above the SFr16.01 blip on August 2, the closing low for the past 12 months.

IFR Editor-at-large Keith Mullin

IFR Editor-at-large Keith Mullin

Investors have seemingly been unmoved by the bank’s capital actions, including today’s update. Looking back at the past few weeks of trading data, I’m a bit surprised that the bank’s moves to sharpen its core capital ratios haven’t been received with more enthusiasm. Then again, some shareholders have been moaning that the boost to solvency is outweighed by the dilutive impact of some of the measures: the MACCS offering, for example, will result in 18% dilution when they convert next March.

Still, the exchange offer for deferred compensation awards (the voluntary cash-comp-for-shares exchange) generated a SFr550m boost to Basel 3 common equity, although this represented a low-ish 50% take-up rate that was below the bank’s expectations. The successful tender for 11 capital and senior funding lines and other debt repurchases resulted in SFr4.8bn of buybacks – double the bank’s initial estimates – adding another SFr380m of core capital. The estimated incremental Basel 3 common equity of SFr 930m contained in today’s announcement exceeded the bank’s SFr800m target.

The exchange in July of outstanding hybrids into Tier 1 Buffer Capital Notes – high-trigger CoCos that qualify for Swiss Total Capital – plus issuance of SFr3.8bn in mandatory and contingent convertible securities (converting in March 2013 and split 50-50 between strategic/institutional investors and existing shareholders) had already created SFr8.7bn of additional capital. Those two actions had been linked via a syncing of the conversion floor of the BCNs with the conversion price of the MACCS.

The measures announced today further reduce the residual SFr6.6bn expected this year from further capital initiatives and retained earnings and ease the bank to its overall target of SFr15.3bn worth of additional capital measures it announced just under a month ago in response to comments by the Swiss National Bank that the bank needed to increase loss-absorbing capital.

When the bank announced its capital measures at the time of the release of Q2 results, CEO Brady Dougan said they “take any question of the strength of our capitalisation off the table”. Dougan is still targeting an ROE of 15%-plus, even after chunky cuts in risk-weighted assets, the sale of real estate and disposal of principal holdings (such as fund manager Aberdeen) and other business alignments. If he can pull it off, it’d be pretty impressive. If you buy his rhetoric and give him the benefit of any doubt, you’ve got to reckon the shares are worth a bit of a punt at these levels.

Goldman and China

After I’d written my recent piece on China, Eddie Naylor kindly got in touch from Goldman Sachs to say that my nuancing around how Goldman runs its China business was a little off-base so I’m happy to provide an update. I’d said that following the departure of Jin-Yong Cai to run the IFC, Matthew Westerman, co-head of Asia investment banking, will in addition be running China investment banking. That bit’s correct but I’d also said that his brief would exclude the Goldman Sachs Gao Hua joint venture.

However, the JV is part of Goldman’s integrated China investment banking platform so Westerman’s role does indeed cover the investment banking business and people that sit within it. My piece inferred that everyone inside the JV is focused solely on domestic transactions. Naylor pointed out that the advantage of having a JV structure like Goldman’s is that the firm can base the bulk of its banking team inside China and deliver both onshore and offshore advice and financing.  

Another benefit of the integrated approach is that the bankers inside the JV are part and parcel of Goldman’s compensation and promotion framework and the firm is able to avoid problems that other firms have encountered in China – which I referenced in my blog.

Goldman will be appointing a separate CEO for the JV but I guess the difference between that role and Westerman’s is the difference between running a business segment and managing a specific legal entity. In that sense, I guess you’d have to conclude that Westerman’s role is the more senior of the two.

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