Credit Suisse needs cash after its investment bank loaded up on risk. The move reveals the disparity between its Wall Street ambitions and its capital reality.

As capital markets boomed in the first quarter, Credit Suisse's risk-weighted assets shot up more than ten percent, to nearly $303 billion. The surge to the highest level since 2017, when ex-CEO Tidjane Thiam ramped down on riskier positions, «was primarily reflecting business growth,» the bank said.

The growth bet went horrendously wrong. Teetering at a precarious level of capital, Credit Suisse needs a quick shot of 1.8 billion Swiss francs ($1.96 billion) to underpin the risks it is taking. The Swiss lender – and its investors – will find out how successful its efforts to prevent the damage from spilling over are in coming months.

Surge In Revenue

Without Archegos, Credit Suisse’s investment bank crushed it globally in the last quarter in every category, propelling an 80 percent surge in revenue to $4.05 billion. The investment bank did many things right in chasing the boom in credit and capital markets.

But of course, the U.S. family office-hedge fund wrought nearly $5 billion of havoc for Credit Suisse, robbing it of any notion of padding its capital with quarterly profits. Its situation is now genuinely alarming: Finma already demanded another $2 billion of capital against Greensill last month.

Regulatory Observation

The bank, which remains under a kind of regulatory observation by the Swiss regulator, will need to reclassify (acknowledge) another 6.5 billion francs in risk-weighted assets next quarter, after settling a 12-year-old mortgage dispute in February.

The capital problem is emblematic of a lost decade under the stewardship of outgoing Chairman Urs Rohner. Credit Suisse has gone cap in hand to investors four times since 2012, without any perceptible change in its strategy. 

Europe Catching Up?

Current CEO Thomas Gottstein's response to criticism of Credit Suisse's capital thus far has been prickly and dismissive. To be fair, that is typical for a Swiss bank CEO: most wealthy clients want the comfort of an ample cushion of capital from their private banks, and executives are keen to play down concerns. 

Its first-quarter risk splurge may have been a case of spotting an opportunity to make good some ground that Europeans have given up the U.S. securities houses. The «but» of course is that Credit Suisse simply doesn’t have the heft of its American rivals – and cannot afford it.

First Boston DNA

Clinging to its First Boston DNA, the Swiss lender is putting a lot more risk on the table chasing capital markets, relative to its size. The quarter lays bare the disparity between its Wall Street ambitions and – crucially for shareholders who are patching it up – its capital.

Credit Suisse wanted to «take the capital discussion off the table» with the swift cap hike, backstopped by its staunchest supporters, Gottstein told «Bloomberg» on Thursday.

Cautious Ratings Agency

In fact, it is anything but: the Swiss lender has no idea how damaging its problems may be to its healthy domestic arm or to business with wealthy private clients, especially more conservative ones. Will clients pull money?

«Credit Suisse will have to demonstrate that the recent events do not result in a further and sustained negative impact on its financial profile, in particular its capital position, and overall franchise,» in order to sustain its credit strength, Moody’s analyst Michael Rohr wrote. The rating agency lowered Credit Suisse’s outlook to negative, from stable, three weeks ago.

Stunning Obstinance

Under incoming Chairman António Horta-Osório, Credit Suisse has to look more seriously at its investment bank instead of pruning at the edges, as it has done until now. The most recent cash call illustrates stunning obstinance.

Next year marks a decade since Credit Suisse was first rapped for a wafer-thin capital layer by Switzerland’s central bank. Under then-CEO Brady Dougan, Credit Suisse responded with a $15.6 billion capital boost – including the very same type of convertible notes which were issued on Thursday.

Peter Hody contributed reporting