Exactly one year ago Friday, Thiam, a former consultant and insurance executive, became CEO of the bank, at a time it faced growing calls to curb its reliance on volatile, and costly, investment banking operations. In October, he unveiled a plan – later expedited – to scale back the investment bank by selling off assets such as complex debt instruments as quickly as possible.
But problems mounted almost immediately. Credit markets soured late in the year. The bank announced big, surprise trading losses in March. Thiam’s handling of investment bank cutbacks proved controversial internally. During his tenure, Credit Suisse’s shares have lost nearly 60% of their value – slightly worse than the performance of Deutsche Bank, another European bank struggling with an overhaul, and notably worse than Swiss rival UBS. The Stoxx Europe 600 bank index is down nearly 40% over the same period.
Thiam said in an internal memo sent prior to the UK vote that much of the stock’s woes are due to short sellers betting – incorrectly, he said – that Credit Suisse will need to raise additional capital.
The bank’s protective capital is mandated by regulators to ensure stability; a fall below a certain level means complications for holders of some of Credit Suisse’s debt. The bank’s buffer has recently been compared unfavourably with that at UBS. Analysts at UBS said on June 29 that now, following the Brexit vote, Credit Suisse may have to ditch paying a cash dividend for a while, in order to help it continue rebuilding its capital cushion. A spokeswoman for Credit Suisse declined to comment.
There are other ways the vote, and uncertainty about its impact on markets, is expected to make Thiam’s job harder. Wealth-management clients may avoid turbulent trading conditions and let their assets sit dormant, starving Credit Suisse of fees, analysts say.
The Brexit vote may also hinder one of Credit Suisse’s core missions at the moment. It is continuing to try to slim its investment bank, and overall balance sheet, by selling off relatively high-risk, debt-linked assets that have weighed it down.
MainFirst analyst Tomasz Grzelak said: ““The prices they get now are not what they could have gotten a week ago. The question is whether there’s anyone willing to buy this stuff in the market, because if you don’t know what’s going to happen in the coming months, you don’t want to add risk.”
A Credit Suisse spokeswoman said in a statement on June 30 that by the end of the first quarter, the bank had made “significant progress” in reducing risk-weighted assets, fixed costs, and risk. “We remain on track,” she said.
Many investors like the idea of Credit Suisse dumping investment bank business. These investors have a preference for fee-based, capital-light businesses like managing portfolios for private-banking clients. But Credit Suisse’s evaporating market value has caused even the bank’s strongest boosters to become reflective.
David Herro, the chief investment officer for international equities at Credit Suisse’s largest investor, Chicago-based Harris Associates, was in Zurich during June to meet with Thiam. Sitting in a cafe near Credit Suisse’s headquarters after that meeting, Herro said he supports the CEO’s stance on investment banking, adding that he thinks traders’ interests had become misaligned with those of the bank’s investors. Internal conflict as a result is acceptable, he said.
But Herro also reeled off challenges shared by Credit Suisse and other European banks, including negative interest rates, which can crimp profits. That made Credit Suisse’s particularly steep stock dive hard to swallow, for someone betting heavily on a successful turnaround. He said with a wry grin: “I don’t know, maybe I’m wrong. It’s happened.”
UBS provided an example of how difficult it can be to dump investment banking business, even in more hospitable conditions. UBS’s effort kicked into gear in late 2012, at a time when European Central Bank President Mario Draghi had pledged to do “whatever it takes” to keep the euro together. That calmed jittery global markets.
Still, UBS has endured a thorny, and lengthy, wind down. “On a proportional basis, we’d be in the ninth inning” of the reduction, UBS chief financial officer Kirt Gardner said in an interview in early June. “Unfortunately, it’s going to be a long ninth inning.”
In 2013, UBS’s non-core and legacy portfolio, designed to sell off investment bank assets, generated Sfr2.3 billion ($ 2.35 billion) in pre-tax operating losses as employees scrambled to unravel business built up over decades. Much of the portfolio held counterparty positions, where the bank bet one way on interest rates over long periods, and now had to encourage the party on the other side of that bet – often clients that UBS didn’t want to alienate – to let UBS walk away.
UBS says it can now sit on much of the assets left and wait for buyers, rather than peddling them at losses.
That may not be the case for Credit Suisse, analysts say. The lender has been dumping chunks of investment bank business that it intends to sell off into a separate wind-down unit unveiled last October, which also includes costs and unwanted parts tied to other units, and held Sfr62 billion in risk-weighted assets as of late 2015.
More recently, the bank has had to add to the pile. Credit Suisse surprised investors and analysts in March with news that problematic debt-trading positions in the investment bank had caused large write-downs in the fourth quarter and the first quarter and meant the lender would dump as much as $ 15 billion more in risk-weighted assets to the wind-down structure.
Even prior to the Brexit vote, analysts were sceptical that Credit Suisse could press ahead with the asset shedding in a timely way, and without heavy losses.
George Karamanos, an analyst with Keefe, Bruyette & Woods, said: “Investors who are waiting for a quick selloff [of unwanted business] at a reasonable price will probably be disappointed.”
Write to John Letzing at email@example.com
This story was first published by The Wall Street Journal