LONDON, Nov 2 (Reuters Breakingviews) – Bank crisis trades have ranged from the terrific to terrible. At the positive end is Warren Buffett’s 2008 deal with Goldman Sachs . At the other is Abu Dhabi Investment Authority’s 2007 investment in Citigroup (C.N), which ended up in court. Saudi National Bank (1180.SE) is continuing the tradition, ponying up about $1.4 billion for a 9.9% stake in troubled Credit Suisse (CSGN.S). Its returns may be closer to Buffett’s than its Gulf peer’s.
SNB Chairman Ammar Al Khudairy hasn’t driven as hard a bargain as the Sage of Omaha did at the peak of the financial crisis. Buffett limited his potential losses by buying low-risk preference shares with a 10% coupon, while extracting warrants to snap up Goldman stock on the cheap. By contrast, Saudi Arabia’s biggest bank is acquiring $1.2 billion of new Credit Suisse shares in a private placement and then participating in the bank’s imminent rights issue. It is picking up the initial stake at a 6% discount to recent market prices, which is hardly a knockout deal.
Yet pushing for better terms would have been risky since Credit Suisse shareholders could veto SNB’s investment. In any case, the $70 billion Gulf lender is buying at a low valuation of under one-third of tangible book value, which augurs well for its returns.
Credit Suisse is targeting a 6% return on tangible equity in 2025, once Chief Executive Ulrich Körner has cut costs and shrank the investment bank. If it succeeds, a fair valuation might be 0.6 times tangible book value. That would imply a market capitalisation in 2025 of $26 billion. SNB’s stake would be worth $2.6 billion, meaning Chair Al Khudairy could almost double his money in three years, for a 24% annualised return.
That’s not as high as the 34% annualised paper return that Buffett was sitting on in 2011, as Breakingviews calculated at the time. But it’s still impressive. And SNB has a fallback option if Körner’s strategy fails. The bank’s local Swiss unit and asset management businesses are together worth $11 billion, JPMorgan analysts reckon, roughly the same as the parent’s current market capitalisation. That means, in a worst-case scenario where Credit Suisse had to break itself up, SNB could escape any losses before even factoring in any value for the core wealth management operations.
The Gulf bank has talked up the wider opportunities of partnering with Credit Suisse. SNB Chair Al Khudairy admitted to Breakingviews that those benefits are “fuzzy”. Still, he’s buying the shares at a cheap price with some healthy downside protection. On that basis alone, it’s a Buffett-worthy trade.
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CONTEXT NEWS
Credit Suisse on Oct. 31 said that Saudi National Bank (SNB) would buy just over 300 million new shares for 3.82 Swiss francs each. That implies an outlay of just under 1.2 billion Swiss francs ($1.2 billion) for the Gulf state’s biggest lender, which will subsequently hold a 9.9% stake.
SNB has also committed to take part in a forthcoming rights issue, which Credit Suisse expects to be priced at 2.52 Swiss francs per share. That would cost SNB roughly 220 million Swiss francs, taking its total investment spend to around 1.4 billion Swiss francs.
Editing by Neil Unmack and Pranav Kiran
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