Credit Suisse Shares Yo-Yo On Capital Requirement Reports

The Swiss central bank believes that Credit Suisse (NYSE:CS) may have insufficient capital to absorb losses in case the debt situation in Europe changes for the worse. The SNB named the second largest Swiss bank over its bigger competitor UBS (NYSE:UBS) as needing additional capital to cushion for losses. Investors dumped shares of the bank immediately after the report leading to a 10% decline in share price over trading on Thursday. As the fact that the market had over-reacted to the news sunk in, there was a significant correction in price the very next day. The shares gained a little over 5% on Friday, with the announcement by central banks that they will act together to fight the crisis in Europe also contributing to the jump.

We maintain a price estimate of $27 for Credit Suisse’s stock, which we are currently reviewing in view of the SNB’s demand from the bank to raise additional capital.

See our complete analysis of Credit Suisse here

In its annual financial stability report, the Swiss National Bank mentioned that Credit Suisse’s current capital structure is inadequate to keep it from failing under a “very severe but possible scenario” it reviewed. ^[1] Consequently, it suggested that the bank focus on raising considerably more capital, and that too within the year. The SNB also outlined options the bank could pursue, including a cut down on dividend payouts, issuing additional shares and selling more risky investment banking assets.

While the conclusion that Credit Suisse is not sufficiently capitalized is bad enough to spook investors, the options provided by the SNB do not help Credit Swiss’s stock value either – consequently triggering the sell-off witnessed on Thursday. We have pointed out the negative impact of raising capital quickly by selling off assets on Credit Suisse’s value on quite a few occasions in the past (see Credit Suisse Barely Out of Red in Q1, Continues Capital Build-Up & Credit Suisse Continues Scramble to Shore Up Capital). And the SNB’s recommendations for the bank to raise as much as $4-5 billion by the end of this year demands exactly that.

Over the weekend Credit Suisse CEO Brady Dougan acknowledged the SNE’s recommendations and announced that the bank will definitely not issue more shares in coming quarters. ^[2] Instead, the bank will retain its earnings for this year at least – cutting down on dividend payouts. Accelerated asset sales for the rest of the year from the bank also cannot be ruled out.

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2. Credit Suisse CEO says no plans for capital hike: paper, Reuters, Jun 17 2012 [↩]