Saudi National Bank has a tactic that may double the value of its Credit Suisse stake

Autor: Article based upon analysis from Reuters Breakingviews | Link: Saudi Credit Suisse deal is fair Buffett imitation
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Saudi Arabia’s biggest bank is investing about $1.4 billion for a 9.9% stake in troubled Credit Suisse, so becoming the biggest investor in the Swiss lender.

Specifically, SNB is acquiring $1.2 billion of new Credit Suisse shares in a private placement and then participating in the bank’s imminent rights issue.

The top landmark for bank crisis trades is Warren Buffett’s 2008 deal with Goldman Sachs. In his negotiation, the “Oracle” 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.
Now, SNB is picking up the initial stake at a 6% discount to recent market prices.

Although far from being a knockout deal, the Gulf lender is buying at a low valuation of under one-third of tangible book value. And this augurs well for its returns.

A 6% return on tangible equity in 2025 may be reached by Credit Suisse, once it has finalized its restructuring plans. That would imply a market capitalization in 2025 of $26 billion, while SNB’s stake would be worth $2.6 billion. All in all, Chair Al Khudairy could almost double his money in three years, for a 24% annualized return.

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On the other hand, if Credit Suisse’s restructuring plans fail, SNB has a fallback option. According to JPMorgan analysts, the bank’s local Swiss unit and asset management businesses are together worth $11 billion.

This is roughly the same as the parent’s current market capitalization. If Credit Suisse had to break itself up, SNB could escape any losses before even factoring in any value for the core wealth management operations, according to Reuters.

After a period of scandals, hefty losses, executive turnover, and waning market confidence, Credit Suisse is trying to recover from a near-existential crisis.

But the 166-year-old bank still has value to offer Saudi Arabia. The kingdom is using the financial sector to drive an overhaul of its oil-dependent economy as the world transitions to renewables.

Buying Credit Suisse shares at a cheap price with some healthy downside protection is a trade worth doing.