Credit Suisse had turned the corner after its billion-franc annual loss last year. Just two months later, the Swiss bank faces a fresh mountain of problems. finews.com parses the most important ones.
1. In Clutches of Tax
The headlines haven't stopped since last Friday, when Dutch authorities raided private homes in four cities and searched Credit Suisse offices. French authorities also raided the bank's Paris offices, or in Credit Suisse vernacular, «visited», while Germany and Australia also initiated probes. Authorities have displayed little evidence so far in the investigation, which is potentially explosive for the bank.
Credit Suisse has maintained that it only manages «clean» European money since 2011. The bank's assurances are quickly drowned in the fresh headlines emerging daily. Analysts reckon the probe will burgeon into a global problem for Credit Suisse.
2. Stuck Operationally
Investors might stomach the new tax probe if Credit Suisse could be relied on for a strong set of quarterly results following its first-quarter loss. Analysts with Bank Berenberg doubt this: short-term expectations for its banking business are already too optimistic, while long-term threats linger, it said. Investors are also baking too much hope into rising interest rates, according to Berenberg, while credit its «as good as it gets» currently.
It remains to be seen whether the German bank's downbeat view will be borne out by Credit Suisse's results later this month. On Wednesday, the bank said its markets – trading – business was subdued thus far, while private banking was favorable. In February, Chief Executive Tidjane Thiam had said that momentum from the fourth quarter had carried over into the beginning of the year for the bank.
3. Capital Gap
Thiam’s big problem is capital: he took over a bank woefully equipped with just 10.3 percent capital nearly two years ago. He quickly raised 6 billion Swiss francs, but that precious injection is long gone: Credit Suisse wrote down $1 billion in unauthorized trades early last year, and it paid $5.28 billion to U.S. regulators in December for mis-selling mortgage securities.
That means that Thiam has made very little progress towards the 13 percent it needs by next year. The bank got a reprieve from regulators internationally, where efforts to launch a fourth round of tougher Basel capital standards have foundered.
Thiam is aware that a trusted Swiss private bank for the wealthy requires an additional layer of capital, beyond what Finma requires. But his efforts to stow earnings as capital have been stymied by the fact that Credit Suisse just posted its second consecutive annual loss.
The fact is that without raising capital in some way (see Point 4), Credit Suisse is behind even laggard Deutsche Bank, where a shareholder injection could vault the German bank over 14 percent of hardest capital.
Barclays, the British bank which also long hedged ambitions of being a European investment banking heavyweight, was at 12.4 percent at year-end, and UBS, which began laying the foundation for its capital base after the financial crisis, is at an enviable 13.8 percent. Credit Suisse, currently operating with a thin 11.5 percent layer, is dead last of its largest peers.
4. IPO or Cash Call – or Neither?
Credit Suisse's will-they-won't-they stance on floating a chunk of its valuable Swiss unit for capital has irritated investors. While preparations for the mammoth move continue full steam ahead, CEO Thiam is openly musing about alternatives to raise capital.
Credit Suisse abandoning its Swiss IPO, which finews.com has argued it will, would anger the unit's staff and management as well as shareholders, who have been sold on the «safe and boring» Swiss bank option. While it is welcome that Credit Suisse isn't in the same capital clinch as it was when it decided to float part of the unit, a retreat from the original strategy will come with loss of credibility for the bank.
Raising funds by issuing new shares, as Deutsche Bank has done for an expected 7.9 billion euros, sounds simple in theory. But will investors warm to the idea of injecting billions into a bank just as an international tax probe involving the bank surfaces, and as criticism of Credit Suisse's pay policies widens to the U.K. and U.S. (Points 5 and 6)?
5. Prickly Shareholders
Tis the season for het up coverage of management salaries, starring Thiam and chairman Urs Rohner. While this is an annual ritual in Switzerland, sentiment also seems to have turned with some large U.K. and U.S. institutional investors. On Wednesday, shareholder advisor Glass Lewis told investors to reject Credit Suisse's 26 million franc bonus pool – a consultative vote.
ISS, another influential shareholder group, has yet to make its recommendations public. To be sure, Credit Suisse's pay practices have sparked a wider brouhaha than is usual. Will shareholders muster more than merely symbolic support at the bank's annual general meeting later this month?
6. Pay Asymmetry
When profits fall, salaries of top executives and board members should be questioned. Exactly the opposite has happened at Credit Suisse: the board, which has hardly impressed with innovation or success in recent years, is helping itself to a healthy paycheck with no relation to the bank's performance.
It is hardly surprising that the topic of pay is now one being discussed in wider segments of society than just shareholders (see Point 5). The issue raises uncomfortable questions of propriety and proportionality for Switzerland, considered a lucrative corporate goldmine in some quarters, as well as in the wider financial industry (see Point 7).
Switzerland's second-largest bank is in a perfect storm because those responsible for its fate have completely underestimated public anger against the unwarranted pay packages.
7. «Damn Bankers»
In a country where many bankers got their start at one of the two big banks, Credit Suisse's identity is as closely entwined with Switzerland as the Matterhorn's distinctive peak. Credit Suisse plays a major role in the prosperity and is part of the backbone of the country's well-respected financial center. Competitors, alumni – no one in the cozy ranks of Swiss banking draws joy out of the bank's current dilemma.
The flip side is that when Credit Suisse is perceived to have gone too far, as they have in recent months, the image quickly spills over into the wider Swiss banking scene. «Damn bankers» is a frequently-uttered refrain from those in Zurich's Paradeplatz banking district who feel they work an honest job. In the stylish coffee lounges and bars surrounding the square, Rohner and Thiam are described as aloof and detached over their exorbitant pay.
8. Qatar Exits
The Arab emirate has been a shareholder in Credit Suisse for years, and upped its stake when the Swiss bank’s fortunes ebbed during the financial crisis of 2008/09.
Qatar’s representative on Credit Suisse’s board, a 35-year-old scion of the country’s ruling al Thani family, is leaving the body without a replacement. Qatar is known to act its stake: it installed a German lawyer friendly to its interests on Deutsche Bank’s board when it lifted its holding in the German lender to nearly 10 percent. The emirate has also been the staunchest supporter of the Swiss bank’s Brady Dougan-led investment banking drive, which is the root of much of Credit Suisse’s dilemma today.
So why are the al Thanis leaving their billion-dollar investment in the Swiss bank unsupervised at such a crucial juncture? The famously secretive shareholder has long maintained good ties with Credit Suisse, so it’s a calculated risk. Qatar, rich in natural gas and owner of Harrods department store, the Savoy Hotel in London and the Shard skyscraper, isn’t hurting for money. There is little to suggest that the emirate will begin offloading its shares, as it did with its stake in Santander’s Brazilian unit last month after a heady rally.
Al Thani’s withdrawal doesn’t alter the fact that Credit Suisse’s board remains a hodge-podge of talented people – a tenured Harvard professor, the CEO of pharmaceutical giant Roche, and the former head of the U.K. financial regulator – which struggles to marshal a team effort on behalf of the bank.
