How CSFB's cheif executive aims to stick to plan
INVESTORS REACTED WELL to plans announced last month by Credit Suisse Group CEO Oswald Grübel to restructure the group, and in particular its investment banking arm, Credit Suisse First Boston. Shares rose almost 5% in the course of the day of the announcement, December 7.
Beforehand, those employees with a dark sense of humour and a basic grasp of history had already dubbed the day Pearl Harbor Day, referring to the Japanese attack on the US naval base on the same date in 1941.
They were expecting Brady Dougan, CEO of CSFB, to announce a shift in strategy away from trying to be one of the bulge-bracket investment banks, and as a consequence also announce large-scale job losses. In the event, neither of these approaches was announced.
After the palace coup that ousted his predecessor, John Mack, in June, Dougan had initiated a six-month strategic review of CSFB's businesses. It was, he tells Euromoney, "the most thorough [review] process I've experienced". Nevertheless, it turned out to be a damp squib.
So perhaps investors' favourable reaction sprang from the news that Credit Suisse will seek to spin off Winterthur, the insurance division it bought in 1997, which has brought the Swiss bank little more than pain since.
At least it shows that executives have a plan B, having been unable to find a trade buyer. "Credit Suisse Group reached the conclusion that at this point in time, the market is not prepared to pay an adequate price for what it believes is the full value of Winterthur," the bank points out. In other words, its competitors won't touch it. Despite this, though, Credit Suisse has turned Winterthur around and made it a profitable business again. That, and the group's now stated commitment to be rid of it, has given investors something to be cheerful about.
So has the decision to integrate the investment bank more fully into the rest of the group. It's the type of structure that several of its European peers already have in place, and has contributed greatly to the success in recent years of arch-rival UBS. Given Credit Suisse's at best patchy history with acquisitions, let alone integrating businesses, few investors are likely to be convinced of improved revenues from the integration soon. "While we see logic in Credit Suisse's plans, from the integration to the sharper client and product focus, we want to see some results first," says Simon Adamson, European banks analyst with CreditSights. "Also, the experience of some of Credit Suisse's peers suggests that the restructuring will not be an easy process to manage."
Plan '06 becomes Plan '07
What investors probably appreciate more to start with is the potential for cost-cutting as various operational and back-office functions are merged, although the bank has released no details yet.
This is the third business review of the investment bank in almost as many years, and the second within a year. The last one, under Mack's leadership, resulted in the dull but simply labelled "Plan '06", by which the firm intended to double profits within three years, or by the end of 2006.
Mack's strategy was based on exporting the firm's US market strengths in leveraged finance and commercial mortgage-backed securities to Europe and Asia, boosting what it already regarded as a leading emerging-markets franchise, trying to get up the M&A rankings, being a top player in IPOs, and improving the firm's prime brokerage offering. In addition he wanted to explore businesses the firm was not in, such as commodities, and was willing, after three years of keeping it on the sidelines, to revamp and expand the proprietary trading desk.
In comes Dougan, hires McKinsey to undertake a five-month review, and decides that the best way for the bank to excel is for it to export the firm's US market strengths in leveraged finance and commercial mortgage-backed securities to Europe and Asia, boost what it already regards as a leading emerging-markets franchise, try to get up the M&A rankings, be a top player in IPOs, and improve the firm's prime brokerage offering. In addition he wants to explore businesses the firm is not in, such as commodities, and is determined, after more than three years of his predecessor's having kept it on the sidelines, to revamp and expand the prop trading desk as well as other risk-taking activities.
Under his plan, Dougan aims to triple 2003 revenues of SFr1.1 billion ($962 million), or double the revenues of the first nine months of 2004, by the end of 2007.
So it's not a new plan: it's the previous CEO's plan with a few words changed. There's nothing inherently wrong with it but the problem is that all investment banks are chasing much the same high-margin businesses most of the time.
Thus far, CSFB has not shown itself to be a fast mover. Two of the more high profile strategies of Plan '06 remain stillborn. First, there's prop trading. Fixed-income heads Jim Healy and Jerry Wood first announced plans to increase this business in April 2003. Mack, Dougan and Dougan's then co-president Brian Finn then added it to their list for Plan '06, and here it is again resurfacing at the end of 2004, although with the added spin of wanting to base it around low-volatility, high-margin quant trading as well as expanding risk-taking on behalf of clients in low-capital-usage businesses.
"We haven't made much progress on expanding that just yet," Dougan confesses. And perhaps that's no bad thing, given how volatile prop trading earnings can be, and how much more sensitive to hiccups CSFB's parent and investors now are. But, even with the new spin, there has been 18 months of talk and not much action thus far.
The same goes for commodities trading. It's a hot favourite on Wall Street these days, because of the eye-popping revenues generated last year by Goldman Sachs and Morgan Stanley of $1 billion or more each. Hence the rest want to jump on board, even though Goldman and Morgan have been in this business for years, have all the infrastructure, and just happen to own some physical assets, which helps enormously.