Credit Suisse’s (NYSE:CS) eagerness to adhere to the stringent capital requirements imposed on it by Swiss regulators continues to show as the Swiss bank recently announced its decision to buy back $4.4 billion in outstanding securities of Tier 1 and Tier 2 securities. 
The bank has significantly stepped up activities to shore its capital structure since November 2011. In fact, the frantic pace at which Credit Suisse is adding to its core capital is actually seen as a cause for concern among analysts as this is taking focus away from its core businesses. Notably, one of the prominent factors behind the bank’s numbers being in the red in the previous quarter was the quick sale of various high-risk assets at loss-making prices. And with competitor UBS (NYSE:UBS) not showing a similar rush to meet the capital targets, one wonders why Credit Suisse is in such a hurry – or if there is something we do not know.
We have a $30 price estimate for Credit Suisse’ stock, which is a premium of nearly 15% to the current market price.
“Swiss Finish” Imposes Steep Capital Requirements
In late 2010, Swiss regulators mandated a 10% core Tier 1 capital ratio for the Swiss banks. This is a good 3 percentage points above the level decided upon for the already stringent Basel III requirement. This move, often referred to as the “Swiss finish,” is an attempt by the country’s regulators to protect the elite and safe perception of Swiss banks among global investors.
Regulators expect compliance from Swiss banks in early 2013. Credit Suisse has taken it upon itself to reach the benchmark over the next few months – and the latest announcement to buy back $4.4 billion in Tier 1 and Tier 2 public securities is another step of this “proactive approach.” No doubt, a strong balance sheet is a necessity, but it is essential to weigh the long-term business impact of speeding up the capital generation process. One rationale that does support Credit Suisse’s strategy is that the relative optimism in the global markets makes it a good time to raise capital. Credit Suisse has done so in recent months through the sale of contingent convertible bonds worth billions of dollars. However if the bank sells more assets at unfavorable prices it could impact our price estimate for the company’s stock.Notes:
- Credit Suisse to buy back $4.4 billion of securities, Reuters, Mar 5 2012 [↩]