First off the blocks

Credit Suisse wins first-to-the-trough equity edge

With big equity hikes, as with chess, the first up has a slight edge. Credit Suisse Chief Executive Tidjane Thiam seems to have taken this capital markets adage to heart: reports suggest he is eyeing a chunky cash call of up to 8 billion Swiss francs ($8.3 billion).

The logic of first-mover advantage in capital raisings is straightforward. Asset managers have finite funds, which can be further restricted by self-imposed caps on sector allocations. So if one bank, say, mops up much of the demand, it can be tougher for peers that follow.

Thiam is in pole position to trump Deutsche Bank and Standard Chartered, two other European banks reviewing strategy. Not only is Credit Suisse due to update investors first, on October 21, Deutsche and StanChart have also indicated they may initially try to bolster capital without passing the cap to shareholders. It would be painful for the duo to sell shares: they trade at big discounts to forward book value of about 40 per cent (StanChart) and 50 per cent (Deutsche). But their reticence should make it even easier for the Swiss bank to raise capital. Investors will be less inclined to keep their powder dry.
 

Reports of an 8-billion Swiss franc hike reflect Thiam's advantages. As Breakingviews reported in June, Thiam needs only 5 billion Swiss francs via a rights issue to give his bank a solid capital footing. Based on its last reported risk-weighted assets and its leverage exposure target for the end of the year, that would produce a common equity Tier 1 ratio of 12 per cent and a leverage ratio based on that top-notch capital of 3.5 per cent. Though Swiss regulators are set to raise requirements, those levels would probably suffice. But raising 8 billion Swiss francs would give Thiam firepower for acquisitions and regulatory caprice.

Crucially, it would also bump the bank's common equity Tier 1 ratio up to 13.2 per cent. That's much closer to the 14.4 per cent mark that UBS recorded last quarter, which trades at a 30 per cent premium to forward book value, versus a discount of 20 per cent at Credit Suisse. Thiam will also need to explain how his bank can grow and where costs can be extracted. But if Credit Suisse is to close the valuation gap, capital is a good place to start.