Once again, Credit Suisse executives promise to take a comprehensive look at investment banking and cut costs while improving the risk management and culture that left it billions in losses. The question is why anyone should expect different answers this time when Chairman Axel Lehmann presents the new plan in October. His main claim is that this leadership is really determined to do something different this time. Don’t hold your breath.
The big picture of Credit Suisse is that its best businesses are in private banking and wealth management, especially in Switzerland, and asset management. These produce returns on equity in the teens or older and have provided steady growth. Investment banking has long been the headache: it has achieved an annual return on capital above 10% only once since 2014 and has been the source of most recent disasters.
As Europe’s mid-tier global player, the investment bank sits in the middle: it’s not big enough to do everything as profitably as the biggest US investment banks, nor nimble enough to offer advice for a hefty fee like the best boutiques. without all the costs of managing a highly regulated balance sheet.
But worse, it’s also “poorly diversified,” as Lehmann put it on Wednesday. It is far too focused on two activities: leveraged finance, which is mainly about financing private equity transactions, and securitized products, which often bring in a lot of money but require a lot of capital and have no link with the rest of the group which stimulates the turnover or profitability of other sectors of activity.
Leveraged finance has had a rotten year, with all banks taking large losses on loans they have yet to sell, including $245 million to Credit Suisse this quarter, putting it in the ranked fourth on the list of biggest losses among bank results to date. Securitized products face increasing competition from US banks and very large alternative asset managers such as Apollo Global Management Inc.
What Credit Suisse should do – and what successive management teams have failed to do – is significantly reduce or eliminate these two businesses, as rival UBS Group AG did after the financial crisis of 2008. Credit Suisse could then focus primarily on equity and currency trading and derivatives, while running a much leaner investment bank advising companies on transactions and raising capital through shares or debts. All of this benefits from the investment demands of wealthy clients.
Lehmann’s outline for the future looks like this: an advisory-focused investment bank that needs far less capital. However, he immediately hedged his bets on the securitized products, saying the bank wanted to keep them, but with some capital provided by third parties. It appears to be focused on partnering with one or more large asset managers, who would invest capital in exchange for Credit Suisse becoming their main source of asset-backed bonds.
Such a structure would be very unusual and complicated to manage. This would still leave Credit Suisse exposed to bad markets, but for significantly lower returns, as it would pay out profits to whoever provides the capital. Banks don’t typically outsource their balance sheets, and a group like Apollo is a growing force because it can source, create and reorganize debt assets within its own walls.
Perhaps the new management of Credit Suisse will offer different answers. After all, the new CEO, Ulrich Koerner, has experience as an operational and financial executive at UBS. He was probably chosen as someone known and trusted by Lehmann, who also only recently came from UBS. Lehmann said the CEO change was aimed at improving “performance, reputation and credibility.” Looks like he damns Gottstein, who, to be fair, inherited future crashes from his predecessor, Tidjane Thiam. And they happened, spectacularly.
Credit Suisse’s problems have lasted for years. If he can muster the courage to take drastic action, it will take him several more years to get the job done. Most of the time, Lehmann and Koerner have to come up with a clear cut answer quickly. I will believe it when I see it.
More from Bloomberg Opinion:
• Credit Suisse reveals where it went wrong: Paul J. Davies
• UBS doesn’t want to be Goldman Sachs — and it shows: Chris Hughes
• Junior bankers deserve their bonuses. Really: Jared Dillian
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.
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