Shares in Credit Suisse (CS) fell another 3% on Monday to their lowest level of 2012. Last week the Swiss National Bank said the company would need a "marked" increase in its capital levels. Shares fell more than 11% already last Thursday on the back of these comments.
Suisse National Bank
Vice-Chairman of the SNB, Jean-Pierre Danthine, said Credit Suisse should take "all necessary actions" to boost its capital base. A further escalation of the eurozone crisis could lead to "substantial" losses for Swiss banks even as the two largest banks of the country have a "moderate exposure to the most vulnerable peripheral euro area countries." Both UBS and Credit Suisse have capital ratios below international averages under the Basel III methodology. Danthine urged Credit Suisse to show restraint with dividend payments, to continue to reduce its asset base and raise new capital.
What are the numbers?
It is very unusual that central banks make public comments about the health of the banks under their supervision. If the SNB decides to publicly warn about the risks at Credit Suisse, the situation must be severe.
Over the last year the bank has made slow progress boosting its capital position. The bank held 36.7 billion CHF in Tier-1 capital by the end of the first quarter. Its core Tier-1 capital increased by 1.8 billion on the year to 27.6 billion CHF. At the same time the total assets held by the bank declined by 2% to 1.02 trillion CHF resulting in a leverage ratio of 4.7% of its wider capital base. Risk-weighted assets fell 3% to 234 billion CHF, thereby increasing the core Tier-1 ratio by 160 basis points to 11.8%. The Tier-1 ratio increased by 90 basis points to 15.6%.
Do not buy into fancy capital ratios
Investors should not get misled by these "fancy" leverage ratios and neither is the National Bank. The notion of risk weighted assets implies that Credit Suisse has almost 800 billion CHF in "risk-free assets" on its balance sheet which is dead wrong. The truth of the matter is that the leverage ratio of 4.7% simply implies that, allowing for a wide definition of capital, the bank is still levered north of 20 times.
The Suisse National Bank is right
The SNB is right in urging its banks to hold additional capital given the shaky accounting foundations and today's financial environment. The two giant financial institutions can easily take their country, and its taxpayers, hostage in case they run into troubles. Taxpayers everywhere would be happy to have public servants like Mr. Danthine at those prominent places in government. Even as the SNB is not the official regulator of the bank, Credit Suisse's response saying that it is "meeting international standards" is cocky, to say the least.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.