Here’s Why Credit Suisse Is Looking To Spin Off Wake USA

Credit Suisse (NYSE:CS) is reportedly on the lookout for private investors willing to acquire a stake in its U.S. fixed income subsidiary, Wake USA. ^[1] The second largest Swiss bank established Wake early last month in collaboration with the high-frequency trading group Tower Research with the aim to garner a larger share of the fixed-income trading market. Unlike competitors who have slashed their capital-intensive fixed income businesses considerably over recent years to comply with stricter capital requirement norms, Credit Suisse chose to maintain a full-fledged debt trading desk. The decision to spin-off Wake is seen as an innovative way by the bank to continue expanding its fixed income business without having to worry about a fall in capital ratios, as it will allow Credit Suisse to shift these assets out of its balance sheet.

The move would no doubt have caught the eye of other banks like Citigroup (NYSE:C) and Goldman Sachs (NYSE:GS) that continue to focus on this high-risk, high-return business. What remains to be seen is how regulators react to this move that adds an additional layer of complexity in their role of overseeing the industry.

See our complete analysis of Credit Suisse here

Credit Suisse set up Wake USA along with Tower Research last year to address technology-related requirements for trading U.S. government bonds, and secured a broker-dealer licence from regulators in March. ^[1] The bank holds a 57% stake in the investment vehicle and has shifted roughly a quarter of its electronic interest-rate-trading operations into it. ^[2] Wake is also expected to begin trading in over-the-counter (OTC) derivatives later this year.

But Credit Suisse is now exploring the option of selling equity in Wake to private investors and spinning it off as an independent company. The rationale behind such a move is two-fold: the bank ensures that it keeps generating revenues from the fixed income trading business and at the same time it also keeps its risk-weighed assets (RWA) under check. The importance of Credit Suisse’s fixed income business can be understood from the chart above which shows that these operations contribute to almost 20% of its share price, according to Trefis estimates. If Credit Suisse is indeed successful in spinning off the investment vehicle, then it could give the bank a practical way to increase its fixed income operations in key locations around the world without negatively impacting its capital ratios. After all, the Swiss capital ratio requirements are arguably the most stringent in the world. This will allow the bank to grow its trading assets steadily in the year to come.

We currently forecast a 4-5% growth in Credit Suisse’s fixed income trading assets in the future, but you can see how a faster growth in these assets can boost the bank’s share value by making changes to the chart below.

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1. Credit Suisse eyes fixed income spin-off, Credit Suisse, Jun 8 2014 [↩] [↩]
2. Credit Suisse May Split Off Part of its Fixed-Income Business, The Wall Street Journal, Jun 8 2014 [↩]