CS Chairman Rohner and the Bitter Pills for Shareholders

Urs Rohner, Credit Suisse

Urs Rohner, Credit Suisse

At the venue, which lies between the country's biggest ice hockey arena and Bern's football stadium, Urs Rohner has a lot to play for. It was at this football arena that Germany beat Hungary to everybody's surprise at the World Cup Final of 1954 – the so-called «Wunder von Bern».

finews.ch thinks Rohner needs another «Wunder» to get the 6 billion francs from the shareholders of Credit Suisse (CS) to finance the expansion strategy of his bank.

After all, giving the chairman what he wants means swallowing five bitter pills for the shareholders:

1. Strategic U-Turn

CS was able to boast that unlike bigger sister UBS it never needed to ask for state aid in the financial crisis of 2008. Instead, Switzerland's second-biggest bank satisfied the increased capital demand with the help of a small number of big investors. They bought shares, bonds and convertible securities. Rohner, who started as vice chairman in 2009 had taken the top job at the bank by 2011 and represented the strategy together with chief executive Brady Dougan.

In October past came the big shift. Tidjane Thiam, Dougan's successor demanded billions of francs to stock up the bank's capital base and lead it back to an expansionary path. That was it with the reputation of a crisis-resistant bank.

2. Empty Myth

Dougan hadn't tired to impress how well balanced the capital base of CS was. Well, the opposite seems to be the case. The core capital quota in the third quarter dropped to 10.2 percent from 10.3 percent. And the leverage ratio increased to 2.8 percent from 2.7 percent at the end of June. CS aims for 3 percent by the end of the year.

Banking regulator Finma recently decided that banks relevant for the stability of the system need to increase their leverage ratio to 5 percent by 2019.

Doubts about the stability of CS appeared for a first time in 2012 when the central bank admonished CS that the capital base was close to the required minimum.

3. Equity Dilution

Today's general meeting will see a heavy dilution of shares, a first under the guidance of Rohner. Following today's capital increase, the number of CS shares almost doubled since 2007 according to «Finanz und Wirtschaft» newspaper, diluting the equity value of existing shareholders by almost 20 percent. The shareholder-friendly strategy of CS hasn't worked, the newspaper concluded.

4. Capital Increase in Two Unequal Steps

Credit Suisse plans the capital increase in two unequal steps. First, it will sell 58 million new registered shares to a limited number of large investors. The price is 22.75 francs per share and the subscription right for existing shareholders was lifted.

In a second step, 260,983,898 further registered shares are sold to existing shareholders. For each registered share held by November 20, 2015, shareholders get one purchase right and with 13 purchase rights they can buy two new registered shares for 18 francs each.

The private placement is tricky as it amounts to an unequal treatment of different owner groups. The never ending saga about Swiss industrial firm Sika has shown where unequal treatments can lead.

5. Weak Supervision

CS wants to be fit for fight within three years. This time for a new strategy defined by CEO Thiam. But Rohner was also supervising the last strategy, which was the work of Dougan. Which begs the question how closely he's monitoring the executives at the bank.

Some owners already demanded for a change at the board level, which can't be read differently than a vote of no confidence in CS Chairman Rohner.

 No Bumpy Ride

Taken together, these aspects should make for a bumpy ride at today's meeting. This will of course remain a theory only. Observers expect shareholders to nod through all the demands by the bank. Which makes perfect sense as everything else would render Thiam's strategy obsolete.

But shareholders won't forget the bitter pills forced down their throats. They will demand to see the promises made turned into reality – for example the doubling of pretax profit by 2018.


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