Dougan’s Worst Month Puts Credit Suisse Dividend at Risk

by Elena LogutenkovaJeffrey Voegeli

Brady Dougan, chief executive officer of Credit Suisse Group AG, pauses during an interview following a news conference in Zurich, Switzerland, on July 22, 2014. Photographer: Matthew Lloyd/Bloomberg

(Bloomberg) -- For Brady Dougan, it’s been the worst start to a year since he became chief executive officer of Credit Suisse Group AG in 2007.
A rise in the value of the Swiss franc following the central bank’s decision to let the currency trade freely, coupled with investor concern that the bank’s balance sheet isn’t strong enough and doubts about the CEO’s plan for the securities unit, pushed shares down 22 percent in January, the biggest monthly drop in Dougan’s tenure. Credit Suisse is the worst-performing European bank this year outside of Greece.
Dougan, 55, is running out of options. He could follow competitors including UBS Group AG in making additional cuts to the investment bank as debt trading lags, shareholders say. To accelerate the buildup of capital, some are even willing to forfeit a dividend.

“Cutting the dividend either partially or all the way for one
year would not necessarily be a bad thing” if that would “finally put to rest any question at all in terms of the financial strength of their balance sheet,” Robert Taylor, a fund manager at Chicago-based Harris Associates, said in an interview. Harris, which oversees $132 billion, is Credit Suisse’s fifth-biggest shareholder, with about a 4.2 percent stake, Bloomberg data show.

‘More Challenging’

Shares in Credit Suisse fell as much as 1.6 percent and were 1.3 percent lower as of 9:35 a.m. in Zurich trading. The stock has posted the fourth-biggest decline this year among the 45 companies in the Bloomberg Europe Banks and Financial Services Index. Only Greek banks are doing worse. The index is up 1.3 percent.
Credit Suisse reports fourth-quarter earnings, including its dividend recommendation, on Feb. 12. The Zurich-based bank, Switzerland’s second largest, paid 70 centimes (76 cents) a share for 2013 after giving shareholders a mix of cash and shares the previous two years. Dougan said in October that the company was setting aside funds for a cash dividend for 2014 to be paid this year.
Hitting capital targets without a dividend cut has become “more challenging” after the Swiss National Bank’s decision last month, Morgan Stanley analysts Huw van Steenis and Canset Eroglu wrote in a Feb. 4 note. A reduction would help cushion any litigation provisions and uncertainty over earnings at the investment bank, they said.

Higher Leverage

Katrin Schaad, a Credit Suisse spokeswoman, declined to comment for this article.
A government-appointed panel in December recommended raising leverage requirements for Credit Suisse and UBS, the nation’s biggest bank, to among the highest in the world. The government is due to submit its own report on the effectiveness of too-big-to-fail regulation to the parliament this month.
If regulators demand more capital, Credit Suisse would be in a weaker position than UBS because it has less capital relative to total assets, said Peter Stenz, a Zurich-based fund manager at Swisscanto Asset Management AG, which oversees 53.3 billion francs and holds Credit Suisse shares.
“Credit Suisse faces pressure from all sides,” said Stenz. “The SNB’s move on the franc was a shock for everyone, and Credit Suisse is one of the few stocks that hasn’t really recovered since because of additional concerns about the bank’s capital and outlook for investment-banking earnings. The management needs to address these issues.”

Debt Trading

While the bank said on Jan. 21 that it had positive trading results and hadn’t suffered any “material” losses in foreign-exchange trading since the Swiss central bank roiled markets, it indicated that currency swings may hurt profit as costs soar in proportion to revenue.
Credit Suisse earns the biggest share of revenue in dollars. Because costs in francs make up a larger share of expenditures than revenue in the Swiss currency, the bank will have to cut expenses to improve profitability.
“The outlook at Credit Suisse has turned sharply worse, and we no longer see value even at these depressed levels,” Omar Fall, an analyst at Jefferies Group LLC, wrote in a Jan. 27 note, cutting his recommendation on the company to hold from buy. “Credit Suisse is challenged by its specific investment-banking footprint, while capital offers little room for maneuver.”
Credit Suisse’s debt-trading unit probably will do worse than European rivals this year because it’s more reliant on leveraged finance and high-yield bonds, which may suffer when U.S. interest rates start to rise, the Jefferies analyst wrote.

Wealth Management

Net income may amount to 805 million francs in the fourth quarter, according to the average estimate of six analysts, after litigation provisions pushed the bank into a loss a year earlier. The bank is expected to report a 22 percent increase in fixed-income revenue from a year earlier, when the unit did worse than competitors, according to the average estimate of seven analysts.
UBS reports quarterly earnings Feb. 10. The world’s biggest wealth manager decided to scale down its investment bank in 2012. The investment-banking businesses that Credit Suisse intends to keep have more than twice the risk-weighted assets that UBS allocates to its securities businesses. Credit Suisse is the fourth-biggest wealth manager in the world, according to the annual ranking by Scorpio Partnership.
Credit Suisse, which has said it’s increasingly focusing on wealth management, has been making cuts at the investment bank bit by bit in recent years -- what Harris’s Taylor called a “dynamic” response to changing rules. Paring back more would help Credit Suisse boost its leverage ratio, said Taylor.

‘Greater Focus’

“If they’re not going to be a top player in the business, and it’s capital-intensive and it can be cyclical in nature, for them to scale those things back, I think makes sense,” he said. “This is a management team that has a proven track record to look at the various options of what to do and to make decisions that overall are going to be accretive to shareholder value.”
Credit Suisse said in October that it plans to cut about 70 billion francs of assets at the investment bank, including about 26 billion francs of reductions it had announced earlier, to help improve its leverage ratio. The bank was considering scaling back the services it provides to hedge funds, a person with knowledge of the matter said in December.
Some investors say they want more decisive action.
“Credit Suisse is not really shrinking risk-weighted assets to the degree that people perceive they should be,” said Andrea Williams, head of European equities at Royal London Asset Management Ltd., which holds Credit Suisse shares. “There is more they need to address in terms of a greater focus on their portfolio of businesses. UBS has gone a lot further in deciding where they can compete.”