Credit Suisse Reveals "Radical Overhaul," Shares Plunge On Dilution Concerns, 9,000 Layoffs

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by Tyler Durden
Thursday, Oct 27, 2022 - 11:39 AM

While there has been much speculation Credit Suisse Group AG could be the next Lehman -- the 2nd largest Swiss bank, desperate for billions of dollars in fresh capital, has unveiled a restructuring plan: multi-billion dollar capital raise, thousands of job cuts, and plans to spinout its investment bank. 

Bloomberg reports CS plans to raise $4.1 billion through a rights issue and sell shares to investors, such as Saudi National Bank (with a proposed stake of 9.9%). CS will spin off its investment bank unit, separating the advisory and capital markets units, while most of its securitized products group will be sold to Apollo Global Management Inc. and Pacific Investment Management Co. We noted CS was nearing a deal to sell its SPG business on Wednesday. 

Under this structure of spinning off its capital markets, advisory and leveraged finance business in a new entity called CS First Boston. Reuters said sources familiar with the matter expect the Swiss firm to IPO CS First Boston. CS will still maintain a large stake in CS First Boston but, over time, will wind down its position. 

CS First Boston will concentrate on US equities in a "capital-light" business to support domestic and foreign clients. The new headquarters will be in NYC, and Michael Klein, a current member of CS' board of directors, will soon step down and become CEO of CS First Boston.  

"The new Credit Suisse will definitely be profitable from 2024 onwards," CEO Ulrich Koerner said in an interview with Bloomberg Television. "We do not want to over promise and under deliver, we want to do it the other way around."

Here's what the new CS will look like...

CS' structure in detail will be in place at the start of the new year.

Details of the restructuring frightened investors in Zurich as shares plunged as much as 12% on the idea of restructuring costs and the dilution effect of the share sales. 

The urgent overhaul comes as CS attempts to restore credibility after huge losses and mismanagement that has destroyed its image as one of Europe's top banks. 

Last month, CS breached liquidy requirements when depositors quickly pulled out money on rising default risks. This caused credit default swap levels to blow out to record highs. The good news is the CS 5YR CDS has declined below 2008 GFC levels but remains elevated. 

CS equity has declined for nearly two years after a series of bad news. Shares topped out in early 2021 at around 13.50 Swiss francs and have since fallen 74%. 

There was also talk CS will begin to reduce 2,700 jobs this quarter and shrink the overall workforce by 9,000 to 43,000 by 2025.

Here's what analysts on Wall Street are saying about the restructuring plan:

JPM analyst Kian Abouhossein (neutral) says restructuring is in the right direction but was hoping for more

  • Says banks seems to want to put a line under concerns of wealth management clients, counterparty worries
  • Says the dilutive capital raise impacts the long-term return on tangible equity generation

Citi's Andrew Coombs (buy, CHF 6) says dilution is disappointing but was widely expected 

  • Adds that his main concern is the low return on equity target for 2025, which "appears to lack ambition"
  • Writes part of the rationale for re-allocating capital is to drive a re-rating, but this can only go so far if the return prospects remain this low
  • The stock appears cheap, even post dilution, but there's likely to be significant execution risk in the coming month; reiterates this remains a "high risk" investment

ZKB analyst Christian Schmidiger (market perform) says the focus is clearly on the strategic realignment, which should meet market expectations with a relatively strong reduction in the Investment Bank 

  • The capital increase of CHF4 bn was anticipated by the market 
  • Views the plans outlined as positive, but notes questions about financing and certain implementation risks remain