What's going on?
Credit Suisse (CS), one of Europe’s biggest banks, announced on Wednesday that it plans to raise about $4 billion by selling new shares to investors in an effort to help turn itself around.
What does this mean?
CS wants cash. But instead of selling off a chunk of its (valuable) Swiss banking unit, as it had previously planned, CS is instead planning to sell new shares in order to pump some new money into the company. That will also boost its “capital cushion” above the minimum amount of cash that CS, like most banks, is legally required to hold in order to reduce the risk of bankruptcy from loans or investments gone bad.
CS released this news along with its earnings report for the first quarter of 2017, which largely beat investors’ expectations.
Why should I care?
For the stock: CS did well this quarter, but that doesn’t necessarily mean smooth sailing in the months to come.
CS posted profits of $600 million in the first three months of 2017, most of which came from its wealth management arm. It’s definitely a big improvement from a year ago, when it posted a loss of about $300 million. Nevertheless, CS still needs to prove that this past quarter was a genuine change of pace, and not just an exception to two straight years of losses for the bank.
The bigger picture: Raising money is easier with a higher share price.
CS wants to raise a set amount of money: 4 billion Swiss francs (just a bit more than $4 billion). The more CS is worth on the stock market, the less new stock it has to sell in order to raise that much money. The bank’s stock price has risen more than 50% over the past nine months, meaning it doesn’t have to give away as much ownership in itself in order to raise the desired funds.