SNB forces C.Suisse rethink on capital bolstering

Fri Jun 15, 2012 3:37pm BST

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* C.Suisse might need to raise several billions of francs

* Bank also likely to cut dividend, slash risk

* C.Suisse says well capitalised

* CEO Dougan under fire

* Credit Suisse shares recoup some of Thursday's losses

By Emma Thomasson and Oliver Hirt

ZURICH, June 15 (Reuters) - A slapdown by the Swiss National Bank (SNB) has forced Credit Suisse to reconsider plans for a gradual strengthening of capital buffers, raising the prospect of a prompt and ill-timed cash call.

The criticism from the SNB has also further undermined Chief Executive Brady Dougan, who was lauded for navigating the bank through the subprime crisis relatively unscathed but has come under fire of late for squandering that advantage.

In its annual financial stability report published on Thursday, the SNB said Credit Suisse should significantly boost its loss-absorbing capital base this year by cutting risk, suspending dividends or raising capital by issuing shares.

The SNB calculated that Credit Suisse had a Tier 1 capital ratio of 5.9 percent at the end of March, compared with 7.5 percent for rival UBS, as calculated under global Basel III rules which demand banks reach 10.5 percent by 2019.

To keep step with UBS this year, Credit Suisse would have to find several billion francs of new capital, with the total needed dependent on how much it generates in retained earnings, how much risk it cuts and what dividend it pays.

"If Credit Suisse was to match UBS' rate by year end, it would have to raise some 4 billion Swiss francs ($4.20 billion)additional capital," Kepler analyst Dirk Becker said in a note, adding that the SNB's report had made issuing shares pricier.

"The focus is probably more on forcing the bank to accelerate its deleveraging, possibly sell businesses and cut the dividend. Another alternative would be another harsh cap on bonus payments," said Becker, who rates the bank "reduce".

Credit Suisse shares tumbled 10 percent on Thursday to their lowest level in almost 20 years, but were trading up 3.3 percent at 17.58 francs at 1416 GMT. UBS shares, which also dipped as the report highlighted its own need for more capital, were up 1 percent, underperforming the European banking sector.

One equity capital markets banker said it was a bad time to be issuing new shares: "Those (banks) that can access the equity markets don't need to and those that need to probably can't."

Credit Suisse responded to the SNB by noting it exceeded current Swiss capital requirements and was working towards meeting stricter rules by 2019, already issuing loss-absorbing contingent convertible bonds and pursing a plan of building up common equity by retaining earnings and cutting assets.

It cut risk-weighted assets (RWAs) in its investment bank to $210 billion by the end of March, exceeding its targets as it aims for a reduction to $190 billion by the end of 2012.

DOUBT ABOUT DOUGAN

Analysts said the SNB report had piled more pressure on CEO Dougan.

"I doubt that investors will still believe the old management, which has said the whole time that there was no need to act," said one fund manager who declined to be named.

"Everybody thinks that Dougan will not be CEO by the end of the year. It would not be too much to expect that a management change could be considered. And rather sooner than later."

Sarasin analyst Rainer Skierka said if Credit Suisse could generate about 2 billion francs from retained earnings by the end of the year and accelerate risk reduction, it would still have a shortfall of 1-2 billion to match the UBS capital rate.

Analysts from Mediobanca Securities noted that UBS made a big cash call within a week of a similar SNB warning in 2009.

"An equity issue appears imminent given the lack of obvious business disposal candidates," the analysts wrote, cutting their share price target to 20 francs from 23 francs and adding they also expected Credit Suisse to pay no dividend this year.

The SNB also said rival UBS, bailed out by the state in 2008, should continue to boost capital by limiting its dividend.

Credit Suisse cut its dividend to 0.75 francs per share in 2011 from 1.30 francs in 2010 while UBS paid its first dividend since the financial crisis - just 0.10 francs per share.

"This confirms our view that Credit Suisse will have to generate adequate internal capital and manage the transition to Basel III carefully to support its current viability rating," ratings agency Fitch said in a note. It rates CS "A"/Stable/"a".

While it is the SNB's job is to guard the stability of the Swiss financial system, the FINMA regulator polices the banks and has not demanded any immediate action from Credit Suisse.

"The market reaction seems overdone given that the SNB has no direct authority and the actual regulator expressed that it was satisfied with the CS capital position," said Skierka.

J.P.Morgan analysts took a similar line: "In our view it is highly unlikely for Credit Suisse to raise equity. We believe ongoing RWAs reductions are more likely. In addition we stress the SNB is not the Swiss bank regulator, but FINMA." ($1 = 0.9535 Swiss francs) (Additional reporting by Kylie MacLellan in London; Editing by David Cowell)

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