Last orders: Credit Suisse cap hike pitch must convince investors this raise is the last

Data Insight ECM Pulse 4 November

Last orders: Credit Suisse cap hike pitch must convince investors this raise is the last

Credit Suisse’s [SWX:CSGN] ambitious turnaround plan comes with an expensive bill in the form of a CHF 4bn capital raise, as originally predicted by this news service. Its success will hinge on whether the Swiss banking giant can truly convince investors that this is the last time it comes cap in hand.

It isn’t a small ask. There will likely be some scepticism among those asked to chip in given it is the third large cash call launched by CS in seven years, investors and advisers alike have noted. Simply put, if CHF 4bn-plus didn’t do the trick then, why will it now?

The capital raise is planned to take part in two stages: a CHF 1.76bn initial share placement, to be approved by Credit Suisse shareholders on November 23, and a CHF 2.24bn rights issue scheduled to price in December.

A CHF 4bn cap hike will dilute shareholders by around 36% based on Credit Suisse’s market cap of CHF 11bn as of November 2 – a far more painful blow than the ones dealt in the bank’s previous raises in 2015 and 2017, for CHF 4.7bn and CHF 4.25bn, respectively.

Few though can argue that CS doesn’t have a plan. In its earnings call last week, it revealed its intention to deliver a new integrated banking model based on its wealth management and Swiss banking units alongside Asset Management & Markets, with 80% of its capital allocated to those three units by 2025.

Its capital markets and advisory division will be carved out into an independent entity, named Credit Suisse First Boston. 

“The previous rights issues were far more a case of just asking for money without a plan of what to do with it,” said a source close to the deal.

“Some people are going to be critical, and some will think they are going too far, but no one can say that this is not transformative in terms of the objectives,” he added.

A second source close to the deal said that Credit Suisse has around 12 to 18 months to start implementing its turnaround plan, admitting there is still some scepticism in the market.

“Management knows the pressure is on,” he said.

While headlines have zoomed in on CS’ capital markets rebranding as First Boston, many missed the bigger story on the bank’s wider simplification plan, focused on its three core units, argued a third source close to the deal.

Investors are already engaging with the syndicate, the source said, adding that news of Saudi National Bank’s (SNB) CHF 1.5bn participation in the share sale in exchange for a 9.9% stake generated early momentum among the buyside. Qatar Investment Authority (QIA) is also increasing its 5% stake in the Swiss bank as part of the first share sale, according to an FT report.

But SNB’s and QIA’s investment might impact the liquidity of the bank’s stock after the rights issue, an investor cautioned. As such, it won’t necessarily be viewed as a positive, with many still needing convincing of the turnaround’s viability.

“Investors are paid to be sceptical, especially in this sort of market backdrop,” the investor noted.

Slaying the sacred cows

While investors may need some persuading, sources stress that Credit Suisse is publicly committed to becoming a leaner bank.

All three sources said that one of the strengths in the bank’s pitch to investors is its new management team, unafraid to make the difficult calls.

“It avoids that ‘sacred cow’ situation where people have attachments to certain assets and are reluctant to part ways with bits of the business,” the first source said. “They know what they need to do and are willing to be clinical and pragmatic, which is very important.”

The last decade of European bank rights issues has shown that the most successful deals have been where banks had been truly committed to change, often under new leadership.

Credit Suisse may turn to UniCredit [BIT:UCG] for lessons learnt. UniCredit priced a landmark EUR 13bn rights issue as part of new CEO Jean-Pierre Mustier’s Transform 2019 plan to re-invent the Italian bank.

Like Credit Suisse in 2022, the rights issue came after a string of capital raises that had failed to improve the bank’s fortunes and was centred around scaling back and simplification.

The deal was a resounding success for UniCredit. The bank got the capital it needed, but it also then executed on its plan of simplification, disposing of its stakes in its Polish Asset Managers, reducing its NPE book and closing branches across Europe.

Within a year, it had improved its CET1 ratio and had its outlook upgraded by Moody’s.

Unicredit’s share price was around 17% higher than its 2017 rights issue offer price the day before CS launched its capital raise last week. The Swiss lender, by contrast, was trading 55% below its last cash call on the same day.

“The proposal is strong and there is nothing too complicated about the plan, it is all now a question of execution,” the first source added.

Credit Suisse knows the story it needs to sell, the question is whether investors believe it.

Credit Suisse declined to comment.

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