How Credit Suisse Can Avoid a Costly Share Sale

A yard sale of disposable trophies and businesses could potentially bring in billions that the bank needs for restructuring.

Paul J. Davies

26 Oct 2022, 07:21 PM IST

Amazing what you can get out of a yard sale.

(Bloomberg Opinion) -- Credit Suisse executives don’t want to sell shares to fund the restructuring they’re due to reveal on Thursday. The good news for shareholders: They shouldn’t need to do so. A string of rumored asset sales ought to get them mostly over the line.

The Swiss bank launched a strategic review in the summer — its third since 2015 — and said this time it was definitely going to get out of big parts of investment banking and markets, which have brought scandals and billions in losses in recent years. But shutting down such operations can be like decommissioning a nuclear power station: slow, costly and dangerous. The best route through is to find enough money to cover restructuring costs up front and get someone else to take capital-intensive assets away. Shareholders then get to see the remaining business clearly and value it appropriately.

For Credit Suisse, restructuring costs are estimated at $4 billion or more by analysts. Paying for this with a share sale would be horribly dilutive for existing investors: The stock is trading at more than a 70% discount to its book value. Axel Lehmann, chairman, and Ulrich Koerner, chief executive officer, are desperate to avoid that.

Instead, they are looking at a yard sale of disposable assets, according to reports, from a posh hotel in Zurich to a stake in a rebranded First Boston advisory firm. Some of these sales wouldn’t be simple, but this is clearly a better way to raise funds.

How Credit Suisse Can Avoid a Costly Share Sale

The value of these bits and pieces, put together from news reports, analyst estimates and my own calculations, adds up to a possible more than $5.75 billion in proceeds or capital freed up on Credit Suisse’s balance sheet. If it can realize even half of this, it would be well on the way to paying for its overhaul.

The biggest chunk comes from Credit Suisse’s Securitized Products Group, the profitable unit that creates and trades bonds made up of mortgages and buyout loans. The bank said it would look for investors to put capital into this unit while continuing to run it. I’ve been skeptical that this makes sense, and Kian Abouhossein, analyst at JPMorgan Chase & Co., agreed in a recent note, saying an outright sale would be better. That would free up about $2.8 billion in capital, according to Abouhossein. Pimco and Apollo Global Management are among several bidders potentially interested, according to Bloomberg News.

The next biggest business is Credit Suisse Asset Management, which Bloomberg Intelligence values at $2.5 billion to $3 billion. This should be a core business for the Swiss bank because it fits with wealth management and private banking — Credit Suisse’s main focus. So it shouldn’t sell the whole thing, but it could offload a minority stake, say 25%, as Deutsche Bank did successfully with DWS Asset Management. That would bring in up to $750 million.

Credit Suisse has also considered selling a stake its advisory business, which helps companies with deals and fund raising, according to Bloomberg news. This could be the rebranded First Boston, but again it’s a service that ties in with its super-rich clients so only a minority stake sale seems possible. The unit has about $2.3 billion of capital and produces a return of 13%, according to JPMorgan’s Abouhossein. Assuming the capital is essentially its book value, those returns suggest a market valuation of $3 billion, so a 25% stake brings in $750 million. The business isn’t simple enough to work easily as a partial public listing in the way that asset management could, so it is more suitable for a large private investor who would have limited ability to resell their stake.

Next is SIX Group, in which Credit Suisse owns a 15% stake, according to a company release. The parent of Switzerland’s stock exchange is owned privately by a host of Swiss and foreign banks. Using SIX’s operating profits after tax and a price-earnings multiple of 20 times, in line with Deutsche Boerse and several US exchanges companies, that stake could be worth nearly $600 million.

An easier — and completely obvious — thing to sell is Credit Suisse’s 90% stake in the Mandarin Oriental Savoy Zurich. This isn’t the 19th century; a serious bank has no business owning a trophy hotel. That’s worth about $400 million, according to reports. It has just sold its 8.6% stake in publicly listed Allfunds Group, a technology company that produces data, analytics and research for wealth managers. The rise and fall in its share price has added distracting volatility to Credit Suisse’s earnings. That stake brought in $330 million. Lastly, there is Credit Suisse’s small Swiss finance and leasing business, Bank Now AG, which has equity capital of nearly $300 million. I’ll just factor that in at its capital value.

All of these add up to serious potential value. There are other possible sales, but with very little information, it’s hard to put numbers on what they might bring in. To be sure, these are rough and ready figures; buyers might be prepared to bid much more or much less depending on the competition.

But the upshot is Credit Suisse has options. And if it really needs more money, Bloomberg News reports a potential convertible bond issue — as I proposed last month. That should cover the remaining costs of bringing about the change the bank desperately needs.