RBR aiming to unlock hidden value in Credit Suisse but breakup faces conundrum

Source:Global Times Published: 2017/10/18 20:53:39

Calls to action are designed to provoke an immediate response. Such imperatives are understandable in the case of Credit Suisse. Shares in the Swiss lender are 13 percent below the price at which it raised money from investors in 2015 and have underperformed the STOXX Europe 600 Banks index by 23 percent since Tidjane Thiam became chief executive. Even so, a plan to split the Zurich-based group into three faces a capital markets conundrum.

Activist investor RBR Capital Advisors thinks a breakup would unlock hidden value. On paper, it appears to have a case. Valuing Credit Suisse's private banking and asset management businesses at peer multiples, based on 2016 earnings and taxed at 20 percent, yields a market value of 39 billion Swiss francs ($39.83 billion), roughly equal to the bank's current worth.

That implies investors are getting the corporate and investment banking divisions for nothing. The involvement as an adviser of Gael de Boissard, a former Credit Suisse investment bank co-head passed over for the top job in favor of Thiam, adds a personal edge to the campaign.

Alas, RBR's clarion cry is drowned out by the practicalities in executing its vision. It is not clear who would want to invest in a standalone investment bank which is sub-scale, doesn't yet earn its cost of equity, and has to fund itself through wholesale markets. Even the mighty Goldman Sachs struggles to earn a 10 percent return on equity. Moreover, Credit Suisse's investment bank is intertwined with its wealth management businesses, in line with Thiam's plan to provide advisory and capital markets services to rich clients. Untangling them would damage both franchises.

Then there is 223 billion Swiss francs of derivatives on Credit Suisse's balance sheet. These require collateral and benefit from the group's investment-grade credit rating when it comes to measuring counterparty risk. Placing them in a low-returning investment bank could jeopardize that rating, driving up funding costs.

There is some evidence Thiam's turnaround plan is working: The lender has reported higher year-on-year net revenue and lower costs in each of the last three quarters. If that trend continues, RBR will face silence. If not, the clamor for change will grow louder - not just in terms of strategy, but leadership too.

The author is Christopher Thompson, a Reuters Breakingviews columnist. The article was first published on Reuters Breakingviews. bizopinion@globaltimes.com.cn

Posted in: INSIDER'S EYE

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