Credit Suisse lays out its grand rescue plan for the group

Credit Suisse may have been in the reasons for all the wrong reasons in the last few years. From funding the family office of Archegos Capital to being caught on the wrong foot in Greensill, Credit Suisse has done most things wrong in the last few years. To add to its woes, it got involved in funding dummy bonds in Mozambique and even funding luxury assets for Russian oligarchs. In short, Credit Suisse had done everything that a sensible bank or wealth manager should not do. Remember, they also had a huge exposure to Evergrande of China, before they managed to escape in the last minute by the skin of their teeth.

The problems at the group came to the fore about a couple of months back when the credit default swap (CDS) spreads climbed to levels not seen since the global financial crisis. That was a classic indication that the Credit Suisse group was on the verge of going bust. At that point, the new top management had promised to outline their grand plan to revive Credit Suisse on 27th October. Accordingly, the bank has laid out the contours of the grand plan, which would be a mix of restructuring the business as well as demanding mountains of capital from existing investors to spruce up its balance sheet. 

What the grand rescue package actually entails?

While the finer details will emerge over the next few weeks, the broad contours of the proposal are out. The markets were not too happy with the plan as weas evident from the stock of Credit Suisse plummeting sharply in the aftermath. But let us leave out the volatile market impact of the move and focus purely on the core plan laid out. Here are the highlights of the plan, that could rescue Credit Suisse from the brink.

    a) That was expected to happen. Credit Suisse will sell or spin off most of its investment bank business and revert to focusing on its core international wealth and asset management business, which has always been its core. It will retain some of its trading capabilities but that would be more from the execution point of view.

    b) Credit Suisse will need capital and it will need a lot of capital. According to estimates, the bank will dilute its equity almost to the tune of 30% as it attempts to raise close to $4 billion through a share sale at an incredibly low valuation. The sharp fall in the market price of Credit Suisse after the announcement of the grand plan was due to the dilution impact on the valuation of the stock. That left investors jittery. 

    c) However, the rot is deep so the return of profit and ROI would be very slow. For instance, as per the current estimates provided by the top management of Credit Suisse, the ROTI (return on tangible equity) would just about 6%. That means it would take a much longer time for the group to be able to add any meaningful value to the shareholders and other stakeholders in the bank.

    d) One big concern of quitting the investment banking business is that most of the deferred tax provisions made for setting off losses against future profits will be now worthless. In the latest quarter, Credit Suisse already took a hit of $4 billion which included a write-off to the tune of $3.7 billion towards deferred tax assets. It remains to be see what will be the full cost that has to be written off due to hiving off the investment banking business.

    e) The share sale is expected to be substantially funded by the Saudi National Bank with the existing shareholders being offered rights shares. Even after this infusion, the capital adequacy ratio will just about get back to a rather precarious level of 14%. Of course, this percentage will depend on how much of write-offs the bank has to take in the fourth quarter ending December 2022.

    f) There are buyers for some of its businesses, in principle. For instance, Credit Suisse will be selling its securitized products business to Apollo Global Management and PIMCO. This is expected to release nearly $3 billion of capital, but these are still in the talks stage and nothing has been signed on the dotted line. In a crisis situation, there is normally many a slip between the cup and the lip. 

    g) By the year 2025, another $2.5 billion of capital will be released when it gets out of a host of emerging markets and European loans, apart from the prime brokerage, which lends to hedge funds. It is likely to generate another $1.4 billion from the sale of its hotel in Zurich as well as its stake in the Swiss stock exchange. 

In the final analysis, the real challenge would lie outside all these points. It would depend on what it does with the CS First Boston unit. It may bring its majority stake in CS First Boston to a minority stake, which could solve most of its capital problems. However, the problem is that Credit Suisse wants to continue using CS First Boston as the main adviser for its biggest clients. This one aspect could hold the key to a successful revival of Credit Suisse.