Why the ‘fundamental’ overhaul of Credit Suisse’s investment bank is long overdue

Last month I suggested that Credit Suisse’s current management team would probably have a little more time to show if they can turn things around. Not much longer, it turns out.

After just two years in the job, Thomas Gottstein is being replaced as chief executive and the struggling group has embarked on another strategic overhaul which it promises will result in the “fundamental transformation” of its investment bank which critics have been asking for years.

Chairman Axel Lehmann said the aim was to produce a “stronger, simpler, more efficient bank with more sustainable returns” and that the investment bank would shift to a “light capital model” led by its operations of ‘advice with a “more focused markets business”.

This seems very similar to what rival UBS did so successfully ten years ago, and it is probably no coincidence that new CEO Ulrich Körner played a key role in transforming UBS for a decade before returning to Credit Suisse as head of its asset management business in 2021. .

In what could be another sign that Credit Suisse is serious about cutting the investment bank, its chief executive Christian Meissner, a former head of Bank of America’s investment bank, plans to leave the group , the Financial Times.reported.

Instead, Lehmann sought to quell persistent speculation that Credit Suisse could spin off its asset management business by reaffirming that it remains a strategic part of the group alongside the dominant wealth management business and the Swiss national banking operation.

Lehmann said one of the group’s aims was to “rebuild trust” with its shareholders. But you can see why, after several attempts at a fundamental transformation of the investment bank, most recently last year, some grumpy investors might wonder if this time will be the real thing.

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True, the group said it was evaluating “strategic options for our market-leading securitized products business,” which represents a hefty $20 billion in risk-weighted assets. Some analysts interpreted that as a potential sale, and on a call with reporters, CFO David Mathers talked broadly about possible exits from the companies.

However, the plan for the securitized products appears to be to bring third-party capital to a business that Gottstein says has “exciting opportunities to accelerate growth.”

Gottstein also played down expectations that the bank’s large leveraged finance business would be radically restructured, despite falling performance and market value losses of $245 million in the second quarter. The operation is closely tied to its significant private equity advisory business, it said, and in terms of performance, its losses were proportionately in line with rivals, while history suggested that difficult conditions of the market in the last quarter would not last much longer.

While this will increase skepticism about the radicality of the changes, it may simply be that Credit Suisse does not want to get ahead of the results of the investment bank’s strategic review. This process will be advised by an ad hoc committee of directors that reads like a Who’s Who of banking, including Michael Klein, ex-Citigroup, Blythe Masters, ex-JP Morgan and Richard Meddings, the respected former CFO of Standard Chartered.

Given the talk of “fundamental transformation” and the aim of delivering “stable returns”, it’s hard to see how this can be achieved without major cuts to its sales and trading business, particularly in fixed income.

Income in fixed income fell 32% in the second quarter, a stark contrast to its biggest Wall Street rivals, which saw huge increases, reaching as much as 55% at Goldman Sachs. Even UBS’s much smaller business was up 19%.

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It’s true that Credit Suisse has much less exposure to interest rates and commodity trading, which grew during the quarter. Meanwhile, the 33% drop in equity trading and sales revenue was largely driven by the withdrawal of Primary Services, which provides trading and financing to hedge funds, following the Archegos disaster.

Performance will also have suffered from churn and a more cautious approach to risk. But you get the impression that these businesses have probably run out of excuses.

Lehmann said the reassessment was triggered in part by the very disappointing second-quarter figures, but it had previously been clear that more radical change was needed. Part of the blame can conveniently be shifted to former president Sir António Horta-Osório, who left under a cloud shortly after presenting the latest strategic renewal.

The new restructuring includes a planned reduction of about 10% in operating costs over the next two years, even without taking into account the planned reform of the investment bank.

But analysts reacted cautiously, many saying they needed to see more details of the plans, and the share price barely moved on the announcement. Shares are down more than 40% this year, 30% more than UBS. This is despite speculation that Credit Suisse could attract a bid, which appears to be wishful thinking by investors.

Given recent events, shareholders should be concerned that there will be more bad news before things start to improve. For some investment bankers, there is no doubt that there will be.

To contact the author of this story with comments or news, please email David Wighton


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About the Author: Chaz Cutler

My name is Chasity. I love to follow the stock market and financial news!