Central bank urges Credit Suisse to capitalise

CREDIT Suisse needed a “marked increase” in capital this year to prepare the bank for a possible worsening of Europe’s sovereign-debt crisis, the Swiss central bank said yesterday in its annual financial stability report. The bank’s share price fell as much as 11% following the news.

“For Credit Suisse, given the low starting point and the risks in the environment, it is essential that it already substantially expands its loss-absorbing capital base during the current year,” the Swiss National Bank (SNB) said.

The central bank, which also recommended UBS boost capital, said improvements could be achieved by suspending dividends or selling new shares in addition to the bank’s plans for cutting assets.

This is the first time the SNB has singled out Credit Suisse as needing a bigger improvement in capital than UBS and putting a time frame on its recommendation. To assess the banks’ capital adequacy, the SNB is evaluating risks from a “severe but possible scenario” of a worsening sovereign-debt crisis. Losses for the banks could be substantial, it said.

“Credit Suisse’s overoptimism on organic earnings means they are now at the low end of all global wholesale banks on a Basel 3 basis,” said Huw van Steenis, an analyst at Morgan Stanley. To boost capital ratios, the bank was likely to shed “far more” risk-weighted assets at the investment bank, as suspending dividends “would not be substantial enough in the adverse scenario”.

Credit Suisse is the secondlargest Swiss bank. Its share price fell Sf1,96, or 10%, to Sf17,04 in Zurich yesterday, the most since December 2008. The share price of UBS, Switzerland’s biggest bank, was 2% lower at Sf0,93.

SNB’s vice-president, Jean-Pierre Danthine, said Credit Suisse’s plan matched SNB’s assessment, though it wanted to see that accelerated.

The SNB’s scenario assumes that the euro zone falls into a “deep recession”, and spreads in Europe and to the US.

This could be triggered by a disorderly default of several smaller peripheral countries in the euro zone, the central bank said.

“Without a doubt, we were negatively surprised by the speed with which SNB wants to see Credit Suisse reduce its capital deficit,” said Derek de Vries, an analyst at Bank of America Merrill Lynch.

“We can only assume that the worsening macro environment has caused a heightened sense of urgency among Swiss policy makers. This is undeniably negative news and increases the probability of a capital increase.”

Credit Suisse’s loss-absorbing capital, comprised of equity and contingent capital that converts to equity at a 7% trigger, amounted to about 5,9% of risk-weighted assets under Basel 3 rules at the end of March, SNB said.

That ratio stood at 7,5% for UBS, it said. By 2019, the two banks would have to boost these ratios to at least 13%. Bloomberg