“There comes a point where you have a big investment bank that you can compete with the big guys, or you’re too small and so it’s better to get out,” says Vincent Kaufmann of the Ethos Foundation, which represents 3 to 5 percent of the voting rights of Credit Suisse. It’s a view shared by the largest shareholder: “At some point they have to fix it or look at other options,” David Herro of Harris Associates told Bloomberg TV on Friday.
A Credit Suisse spokesperson says: “We will update the progress of our comprehensive strategic review when we announce our third quarter earnings; any reports of possible outcomes before then are entirely speculative.”
Difficult task
The toughest challenge for Koerner and Lehmann will be exiting or liquidating businesses without racking up ruinous costs or severely damaging the company from lost revenue.
While activities like securitized debt trading are volatile and capital intensive, they can generate monstrous profits. It will also be difficult to find partners or buyers for these units in current markets.
The Swiss duo will also have to successfully navigate any boardroom disagreements with investment banking advocates. Backing from their national authorities can help them, people familiar with the matter say.
Ulrich Koerner. The new head of Credit Suisse Group appears to have had enough of the Swiss giant’s investment bank.
“The bank really needs to gain stability and customer trust,” says Kaufmann. “They disclosed this new strategy, but what remains to be seen is its implementation.”
It is the second consecutive August that bankers are waiting for the ax to fall while their superiors devise another strategic rescue plan. Under the previous one proposed by former president Antonio Horta-Osorio in November, the idea was to cut investment banking without decimating it and cut costs by avoiding the exodus of talent. It didn’t work.
The astronomical first-half loss was the straw that broke the camel’s back, says a senior executive. Thomas Gottstein, a cool but powerless CEO with long-standing ties to investment banks, is out. Koerner is inside. The gruff and unsentimental asset manager is known for being willing to fire people. He was chief operating officer of UBS Group for a period of four years when his staff was reduced by 16,000.
Lehmann, another UBS stalwart, is the second part of a new leadership double act that will put restructuring before business creation. Speaking to Bloomberg TV recently, Lehmann promised a “major redesign” of Credit Suisse. Investment bankers in Europe and the United States are bracing for the outcome. Switzerland and Asia can do better.
The breakneck speed at which Lehmann and Koerner are moving (details of their renewal are expected along with Q3 results in October) shows Credit Suisse’s dire straits. He is still recovering from the huge losses of Archegos and Greensill. Rate company S&P has warned of “increasing risks to the stability of the bank’s franchise”.
The core capital ratio, a measure of financial health, is a relatively strong 13.5 percent, but has been falling as losses mount. “They have four businesses, one of which is absorbing the profits of the other three,” says Herro.
As was the case last August, employees speak of paralysis and discouragement, and a hemorrhage of talent. But there is also growing alarm about investment bank malaise holding back healthier parts of the company.
While Lehmann says Credit Suisse “still has an excellent client franchise,” other experts say he has been desperately trying to meet with and reassure some of the bank’s billionaire clients. At least one of your top 10 clients wants to move their money elsewhere. Reputation damage, uncertainty and an exodus of talent are making it hard to land new jobs, employees add, speaking to a barrage of questions from customers about the company’s stability.
Some concerned customers have moved away from long-standing products. Even at the best-performing Swiss bank, mandates with major corporations have been lost to UBS because of that stigma, says an employee at the unit.
extra envy
Some wealth managers are also upset about the generous rewards being offered to investment bankers, especially given the division’s bleak future. Despite the company cutting its 2021 bonus fund by $1 billion, in the past 19 months it has handed out $1.3 billion in retention packages and one-time awards to stem defections.
“I don’t think these big retention packages for investment bankers are money well spent,” says Kaufmann, who says it’s unfair that the Swiss national bank’s bonus pool has been cut. “Management needs to be careful where the cuts are applied.”
“Cost cutting has to come from bonuses and salaries, so they won’t be able to pay more,” says Arturo Bris, a finance professor at IMD Business School in Lausanne. “That’s how a wealth manager fails, because it becomes a vicious cycle: you can’t compete in recruiting and retaining good talent.”
A big problem facing Lehmann and Koerner is that they are trying to carry out their rescue work just as market conditions have turned against many of Credit Suisse’s best moneymakers, causing their income is unstable.
Previously, the bank made a lot of profits from Chinese companies listed in the US, like Alibaba’s $25bn initial public offering, but geopolitics has killed it. Credit Suisse was also the go-to advisor for Special Purpose Acquisition Companies (SPACs), but that craze is over too.
Jack Ma, billionaire and chairman of Alibaba Group Holding. Credit Suisse made a lot of profits from Chinese companies listed in the US. Bloomberg
It is one of the largest providers of leveraged finance to private equity firms, another industry that has recently struggled. Russia was a major growth market for the Swiss lender before Vladimir Putin’s bloody assault on Ukraine.
Ironically, the main brokerage unit that was closed after the Archegos debacle may have been a bright spot this year, as hedge funds are doing well. “The bank has a mix of bad strategy, bad executives and bad luck,” says Bris.
“Credit Suisse still has the same three key issues: revenues are trending down, costs are trending up, capital is below target, and capital generation is at risk due to low underlying profitability and incremental litigation costs,” Flora Bocahut of Jefferies wrote in a research note this month. month. “The outlook remains particularly dark for CS in a challenging context for the industry.”
For the bank’s new top brass, the answer is to cut costs to 15.5 billion francs ($16.2 billion) in the medium term, well below Gottstein’s target of 16.5 billion francs to 17 billion francs. And they want to shred the pieces of the investment bank that gobble up capital.
Herro estimates that the stock price attributes a negative value of approximately $10 billion to $15 billion to the split. A special board committee, led by longtime Citigroup banker Michael Klein, is overseeing the culling. Unit chief Christian Meissner is helping out, although he is expected to leave once he is done.
ancient glory
Rival banks offer potential blueprints. Deutsche Bank pulled out of stocks during its own crisis; UBS merged its equity capital markets and debt capital markets teams as it doubled down on wealth management.
Credit Suisse’s desire to maintain a competitive global advisory business seems feasible given that it has played a role in most of the major M’s.&To this year, including Broadcom’s $61 billion purchase of VMware. But swaths of talented traders have jumped ship, and the quality of their replacements is unproven.
A senior investment banker says the division is divided between people who polish CVs and others who dream of returning to the glory days of Credit Suisse First Boston, when the deals team was in its pomp. Some wealth managers question the idea that their billionaire clients are a good source of work for the bank’s dealers, arguing that they still prefer Goldman Sachs and JPMorgan for the big stuff.
One deal that doesn’t look imminent is a takeover of Credit Suisse, even if bankers are promoting it, though sales or spin-offs could be considered for any parts of the investment bank that retain value.
Experts believe that the Swiss authorities want to give Koerner and Lehmann time to present their national solution from a Swiss bank, in addition to wealth and asset management. Regulators want an orderly restructuring that doesn’t jeopardize the country’s second-largest lender.
“For Credit Suisse, it’s like a football team,” says Bris. “It depends on the loyalty of the players. If you can depend on people to do a good job at lower pay, then you have a chance. Otherwise, I’m worried.”
— Bloomberg
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