… Well, would you look at that:
Capital ratios offer one nonsense way to approach Credit Suisse’s first-quarter results. Earnings offer another: basic EPS of Sfr3.1 ($3.49) meant it was CS’s most profitable quarter since 2007. A cursory check of the data suggests it’s the biggest quarterly profit per share booked by a systemically important European bank since the GFC.
Before you all rush to the comment box, let’s emphasise the obvious. Headline numbers are wildly distorted by the zeroing in March of CS’s AT1 buffer securities to raise Sfr15bn. The emergency cash infusion is recorded as corporate centre net revenue, resulting in a record pre-tax profit of Sfr12.8bn.
Putting numbers on the bank run is more instructive. First-quarter outflows totaled Sfr61.2bn, or 5 per cent of assets. Wealth management alone bled out by nearly 10 per cent, or Sfr47.1bn, as withdrawals peaked in the days around the UBS shotgun marriage. The shrinking capital stack reduced net interest income by 39 per cent sequentially to just Sfr900mn. Net borrowings from the SNB liquidity support facilities at the quarter end amounted to Sfr108bn.
There’s also a zeroing of goodwill for wealth management, which creates a Sfr1.3bn charge, and a warning about the uncosted nature of dismantling an investment bank.
After making all the appropriate adjustments, CS’s underlying quarterly loss is slightly more than Sfr1.3bn, which another cursory checks suggest is probably the heaviest booked by a systemically important European bank since the GFC. While CoCo holders will argue that they were not treated equitably by Swiss regulator Finma, the results underline that in all plausible outcomes their paper was going to be worthless.
But is CS enough of a basket case to weigh down UBS? Who knows.
Gutting the investment bank is an obvious first step to stabilisation, as our Lex colleagues argue. Here it’s worth noting that prep has already begun with creation of a Capital Relief division. UBS only has to wear the first Sfr5bn of markdowns, writedowns and restructuring costs, after which Sfr9bn of state guarantees come into play, so the task of making CS boring again has a bit of runway.
Speaking positively for boring-ification are stable Q1 revenues and relatively modest outflows from the Swiss bank, which may hint that franchise value isn’t irreparably damaged domestically. The option to partially IPO the Swiss bank is a useful safety net for UBS if its integration plan stalls or overruns.
More alarming for incoming management is CS’s asset management division, where fair value exceeded the carrying value by less than 10 per cent. Any further worsening would require another goodwill impairment, which would be much more damaging to confidence in the rescue mission than the IB writedown.
UBS posts first-quarter numbers on Tuesday. New CEO Sergio Ermotti has already flagged that investment bank trading flows have been weak in the US and worse both for APAC and EMEA, so divisional earnings will probably be down year-on-year by more than a third. Stability or better for wealth management is much more important.
JPMorgan talks about how a combined CS-UBS will be in a sweetspot among Asia-Pacific’s ultra-high-net-worths, with $500bn in regional assets under management and scope for inflows of approximately $150bn every year.
Getting there will cost $27bn in restructuring, fair value adjustments and legal expenses so the day-zero buffer of almost $20bn should be sufficient, says the broker, which saw nothing in today’s CS numbers to change its opinion:
Post acquisition, we see the Newco UBS becoming one of the most attractive business models in Global Banking with 60 per cent of Group PBT coming from Wealth Management and only 10 per cent from IB. In addition, we forecast the combined entity to be a cashflow powerhouse generating almost 160bps in CET1 capital pre-distribution in 2027E through a capital-light model of asset gathering accounting for almost 70 per per cent of Group PBT.
[ . . . ]
We forecast UBS to be a $3+ EPS bank by 2027E . . . with full downside protection from the optionality of a Swiss Bank IPO/spin-off at minimum $10bn valuation, should the complex integration not deliver.
Though of course, Credit Suisse is already a $3+ EPS bank. Be careful what you wish for.
Further reading:
— The rise and fall of the bank that built modern Switzerland (FT)
— Who killed Credit Suisse? (FTAV)
— Why bank capital has a problem (FTAV, 2017)
