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Suisse’s pieces

21 October 2015 By Dominic Elliott

Credit Suisse looks like a cut-price UBS. Can it do better? The fresh strategy from new chief Tidjane Thiam goes some way towards closing the Swiss bank’s valuation gap with its cross-town peer. Credit Suisse will raise 6.05 billion Swiss francs ($6.3 billion) in equity and become a wealth manager first and foremost. What’s needed next to shake off the invidious comparison is growth.

Thiam’s approach, unveiled on Oct. 21, is right. UBS rejigged its strategy back in 2012 and its shares now trade at a 30 percent premium to forward book value, versus a 10 percent discount at Credit Suisse. And Thiam’s third-quarter results showed the need to cut in fixed-income trading: revenue fell 42 percent year-on-year, more than at any Wall Street institution.

Wealth management, meanwhile, is at least still attracting healthy slugs of savings – even if it missed consensus forecasts on weaker transaction revenue. Cuts to the balance sheet and personnel will leave an investment bank that is a touch bigger than UBS’s and a wealth manager with room to grow.

Thiam also has grasped the need to bump up the bank’s lowly capital position. Via a share placing to institutions and a rights issue, Credit Suisse’s key core equity Tier 1 ratio should rise to 12.2 percent, from its 10.2 percent end-September level. Listing the group’s Swiss businesses could raise up to an additional 4 billion Swiss francs.

The snag is that with more equity, even more earnings growth is needed to create a decent return. Assume Credit Suisse post-revamp carries equity of around 40 billion francs. Adding together the group targets for pre-tax profit by 2018 as well as, say, an additional 2 billion Swiss francs for investment banking, comes to a total 8.5 billion Swiss francs. Apply a tax rate of 30 percent and Credit Susisse might make a return on equity of 15 percent in three years’ time.

That would compare favourably with UBS, which is forecasted to produce 13 percent. But that assumes all the growth pencilled in comes good. Assume no growth and lower investment banking earnings and the returns might be just 9 percent. Thiam eschews return on equity targets because he argues that is something he cannot control. Yet growth can be just as hard to pin down.


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