This content was published on October 27, 2022 – 15:38
(Bloomberg) — Credit Suisse Group AG’s top two leaders described their plan to remake the troubled bank as “radical” and “decisive,” promising an end to half-measures.
The multiyear reshaping funded by a new Saudi Arabian backer marked a historic move away from going toe-to-toe with the biggest Wall Street players and an unprecedented attempt to spin out a boutique investment bank.
And yet many analysts and investors expressed concern that some of the most decisive elements won’t be determined for a while, and a few even questioned whether the moves were extreme enough.
“We had hoped for a more radical retrenchment,” said Stefan Stalmann, an analyst with Autonomous Research. JPMorgan Chase & Co.’s Kian Abouhossein echoed that sentiment, saying he was “hoping for more shrinkage in the investment bank” and calling the plan more complicated than resets at Deutsche Bank AG and UBS Group AG.
Amid stock dilution from the coming share sale and the prospect of just “nominal” dividends until 2025, the shares tumbled 19%, the biggest single-day decline on record.
The need for something dramatic can be seen in the scale of the bank’s fall. A $4 billion third-quarter hit ensured that Credit Suisse’s loss this year will wipe out the profit it made over the past decade. The firm’s market value dipped below $10 billion this month from $50 billion less than five years ago.
That’s prompted the embattled lender to refocus on wealth management and bread-and-butter Swiss banking. The complex restructuring laid out by Chief Executive Officer Ulrich Koerner and Chairman Axel Lehmann involves raising 4 billion francs ($4.1 billion) in a capital increase backed by Saudi National Bank, slashing the workforce by 17% and breaking up its investment banking unit.
But the costs are high and the once-venerable firm is asking shareholders to wait a long time for a limited return.
The capital increase, equivalent to about one-third of Credit Suisse’s market value, is an indication of the level of desperation. Bank executives had wanted to avoid selling equity given the shares were trading near record lows, but outflows from wealth management clients forced their hand.
Analysts expressed disappointment over the modest goal of raising the group’s return on tangible equity to 6% in 2025, with Citigroup’s Andrew Coombs calling it “lowly.” The figure is less than Deutsche Bank’s target for this year, which started a strikingly similar restructuring effort in 2019.
Credit Suisse dipped into the past for its turnaround by reviving the First Boston name, which was ditched in 2005 after falling into ill repute following scandals and declining profitability. The investment bank will become a separate unit based on a partnership model — a throwback to a Wall Street era when key employees were granted a level of ownership.
The entity, dubbed CS First Boston, along with selling the majority of assets in its securitized products group to Apollo Global Management Inc. and Pacific Investment Management Co., are part of an effort to slim down the investment bank. The firm wants to reduce risk-weighted assets by 40%. Stalmann of Autonomous Research said he was looking for a cut of about 75%.
CS First Boston will be led by Michael Klein, a veteran ex-Citigroup dealmaker, and will include the bank’s historically strong advisory and leveraged finance unit. But the ownership structure remains murky, meaning Credit Suisse could one day be asked to bail out the unit like it did in 1990.
Koerner said that once the unit is a separate legal entity, the bank could reduce its stake but retain majority ownership, and over time could even cut that to a minority holding or IPO the business. Credit Suisse already has a $500 million commitment from an undisclosed anchor investment for the CS First Boston unit.
“It is not yet clear where we end up, obviously, because we are at the very beginning of that journey,” Koerner told analysts.
What Our Analysts Say:
Whether this is enough remains to be seen — the markets outlook is challenging and execution risk is high. Results for 3Q were weak across the board, underscoring the urgency of the plan.
— Jeroen Julius, Bloomberg Intelligence. (Click here for more)
The pivot marks a major stepback for Credit Suisse, which not long ago was in the inner circle of global trading giants. In the five years ended in 2014, Credit Suisse generated more than $50 billion of trading revenue, topping Morgan Stanley in that period.
But over the past decade, Wall Street firms have continuously gained ground and several European banks have scaled back in the most capital-heavy businesses. Deutsche Bank got out of equity trading, and UBS’s investment bank cut assets more than 80% from the pre-crisis peak.
Credit Suisse had already chipped away at the size of its markets business through a series of moves. In the five years ended in June, it’s trading haul was about $30 billion, less than half of Morgan Stanley’s $80 billion.
Third-quarter earnings provided a bitter backdrop for the announcement. Revenue dropped across the investment-banking division — the only major Wall Street bank to do so — while wealth-management clients yanked funds.
The operational issues added to outstanding questions about the overhaul, prompting some analysts to recommended steering clear of the Swiss firm.
The latest quarterly figures show “deterioration in momentum that we find concerning though not very surprising,” Flora Bocahut, an analyst with Jefferies Financial Group Inc. said in a note. “Given the significant uncertainty and execution risk, we continue to see a better risk/reward elsewhere.”
The coming months will remain bumpy. Credit Suisse forecast another loss in the fourth quarter and indicated next year would be tough before turning profitable in 2024. Still, Koerner pushed back against skepticism.
“What we are announcing now today is basically a new Credit Suisse,” he said in an interview on Bloomberg Television.“We do not want to overpromise and underdeliver. We want to do it the other way around.”
–With assistance from Steven Arons, Francine Lacqua and Myriam Balezou.
(Updates share-price move in fifth paragraph.)
©2022 Bloomberg L.P.
Source: news.google.com
