Credit Suisse seems to have been ever-present in the news recently for all the wrong reasons, with two major scandals fuelling the markets and the media with sensational stories. Whether the bank’s involvement in two idiosyncratic events in quick succession – Greensill and Archegos – was down to poor risk management or bad luck is open to debate, but management now has the opportunity to closely scrutinise risk-taking with the likely result being that risk appetite will diminish.
Behind the headlines Credit Suisse’s usual business has actually been rather impressive in Q1, with net revenues up 31% and the net loss of CHF252m due to a massive provision of CHF4.4bn relating to the aforementioned events. Not great news for shareholders, but from a bondholder perspective the bank’s position looks much more solid with the CET1 ratio virtually unchanged at 12.2%.
What is most interesting about the CS situation though is that to us it illustrates the ability of large banks to bolster capital when such events occur, and the range of options they have to do it. The CEO, Thomas Gottstein, this morning outlined what you might call the expected management response – personnel changes, a meaningful deleveraging of risk assets, and of course a full review when the new chairman starts. However, the announcement of a CHF1.7bn mandatory convertible deal, placed with existing shareholders and ultra-high net worth clients, immediately adds 60bp to the bank’s CET1 ratio. Along with a suspension of its planned share buyback programme and a postponement of the dividend, the CS balance sheet looks in decent shape with the CET1 ratio likely to be back in the 13-13.5% range by the middle of this year (over 300bp above the regulatory minimum).
We understand why equity holders may feel further bruised by these events and of course today’s dilution, but we think AT1 holders will be comforted by yet another illustration of how much banks in general have improved their balance sheet resilience since the credit crisis over a decade ago, and the levers now open to them which can help protect holders of bank capital notes.