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Brady Dougan has been chief executive of Credit Suisse since May 2007. He admits his timing – taking the job just three months before the first waves of the sub-prime crisis hit the market – could have been better. Little more than three years into the job, he is already one of the longest-serving heads of a big, global bank.
His remarkable achievement in that time is that Credit Suisse has not only survived, it has thrived. Only a few years ago, competitors were happy to write Credit Suisse off. Its glory days were from another era, they said – a private bank to be held in esteem, but an investment bank that had lost its way and was playing in the minor leagues.
Their view of Credit Suisse has changed dramatically. It is widely acknowledged as the top private bank in the world. It has led the industry in transparency, on both its market positions and its compensation.
Credit Suisse’s investment bank is held up as a model for the future, one that other banks wish to emulate. The firm is low risk and capital efficient. Its model is one that should cope with regulatory changes more comfortably than most competitors. Its capital is among the highest in the industry, with tier 1 at 16.4%. Its return on equity for 2009 was 18%, second only to Goldman at 23%. Yet while Goldman had risk-weighted assets of $432 billion, Credit Suisse had RWA of just $215 billion. In the first quarter of this year Credit Suisse’s RoE rose to 22%.
Dougan has achieved all of this in the considered, collaborative style that defines him and contrasts him with many of the high-profile CEOs of the previous generation.
But now he faces a challenge to keep growing Credit Suisse as others seek to replicate large parts of his model, and try to do it bigger and better. Can Credit Suisse stay ahead of the game?
Dougan spoke to Clive Horwood.
Q: Was there a specific point when you decided you had to change Credit Suisse’s business model?
It was announced in February 2007 that I would become chief executive and then confirmed at the AGM the following May. In the intervening period, we had a lot of discussions with the management team about the bank’s strategy. And during those discussions, we developed the idea that a client-focused, capital-efficient strategy was the right one for Credit Suisse going forward. It suited the businesses that we had and differentiated us.
Q: It was decided while the boom markets were still in full swing?
A lot of people think we embarked on this in response to the crisis. Of course some of the timing and details of what we eventually did were influenced by later events. But we presented this strategy formally to the board in June 2007.
Q:So you had some luck, as well as good judgement?
Having this strategy in place was the most important element in allowing us to come through the crisis in a relatively strong position. A lot of people say we reacted quickly to reduce risk and that we called correctly that the market would not bounce back, while others held positions expecting a rally. I wish we were that smart. The truth is we were just trying to execute our strategy. It also meant that by the end of 2008 we were in a great position to execute on the rally over the next 12 months.
Q: Back in 2007, people weren’t talking about the need to be capital efficient. Was there anything specific in the business that led you in that direction?
For the previous decade, the accepted wisdom was that it was not possible to be sufficiently profitable just by doing business with clients. The only way to make money was proprietary trading or positioning on balance sheet. Client business was seen as a loss leader, a way to get league table credit.
But we thought if you did it correctly, you could have high-quality earnings with a client-focused approach. And where we were different was that we had a substantial, successful private banking business. That is obviously a client-intensive business, which needed relatively little capital, was not volatile and earned high multiples. The struggle we had was that people would look at that and say: “Well, you’ve got a good investment banking business, but it’s more volatile, it’s risky”. And that dragged down the overall picture.
We also knew that the combination of the private bank and the investment bank would be powerful if we could properly drive business between the two of them. But to do that, we needed to make the investment bank more client-focused, capital efficient and less volatile.
Q: Was the decision influenced at all by the fear you could not really compete with the firms such as Goldman that were seemingly so good at the proprietary business?
Not really. We decided early on that we wanted to focus on doing one thing very well, rather than trying to be all things to all people. It’s much better to be very good at one discipline. It could be excellence with clients. It could in allocating capital and taking risk. Or there’s a scale model where cost efficiency is key. Over the years we’ve had some great capital committers, risk managers and traders. Look around many of the leading hedge funds today and you’ll see a lot of ex-Credit Suisse people working at them. At that point, the client piece was the least contested and we felt it naturally fitted our business mix. However, most firms were riding down the capital path.
Q: Did the board take much convincing?
They were very supportive of the strategy when we put it to them and the turn of events later in the year only reinforced their views.
Q: What about within the investment bank?
There was a lot of debate about it. And it wasn’t easy at times over the next couple of years as we exited some businesses we had been very good at. But the management of the investment bank and the leaders across the businesses understood the long-term strategy.
Q: What was the toughest decision you had to take?
I guess the right decisions look easy and the wrong decisions look harder with hindsight. We’d been making a lot of progress on the strategy during 2008, but the acceleration of it post Lehman was a very intense period. The execution of the strategy at a very difficult time in the markets was tough for Paul Calello and his management team at the investment bank, but they rose to it.
Q: You came out looking smart. But what decisions do you look back on and regret?
We certainly made mistakes. While we had cut our exposure to sub-prime in 2006, we continued to take on CMBS assets well into 2007. Our money market business in the asset management space was strategically not an area we should have been in, and we lost money on that as many others did. But I think through the last few years, we have generally made the right decisions.
Q: Some of them stand you in very good stead, in particular in relation to the regulatory environment.
Our strategy was well suited to an environment where the regulatory requirements were going to increase across the industry. We started taking decisions on businesses and capital that have left us in good shape now. For example, we exited the longer-dated exotic derivatives business to focus on traded, more liquid products. At the time we were leaving the highest-margin part of the business. But if you look at the regulatory landscape now, particularly around derivatives, we believe we are in a good place.
Q: But you’re far from immune from the regulatory changes as a global bank operating in many different jurisdictions?
It takes up a lot of our time, but we’ve been preparing for it. We’ve built up a very strong capital base. We’ve been terming out our debt and that has cost us. Our 2009 results, good as they were, would have been even better if we had not been very conservative about pushing out our liability structure. But that puts us in a very strong position.
Q: In particular, the FIG debt markets had one of their worst periods on record.
But investors see us as a safe haven. We did three bond issues in that period.
Q: But you have this big capital base and it is likely to be some time before other banks have to match it, even if they have to get there in the end. Is that a disadvantage for you?
It’s certainly a lot more capital to make returns on. But making a 23% return with tier 1 capital of 16% shows how solid they are. And having that capital base is important for the business model. We are one of the safest counterparties out there.
Q: Competitors say you have a good model, but you don’t have sufficient scale. Does scale concern you?
We’re substantial enough to be a competitor, and a leader, in all the businesses we want to be in. It’s important to get the balance between size and focus right. I like our focus across the high end of private banking and asset management and the client-centric model of the investment bank. It’s high margin, with a premium on the right human capital, which makes it easier to integrate and drive value. It’s also broad enough to allow us to be very large in terms of market cap.
Q: And how will you face the challenge of banks that are trying to enter your space and say they’ll do it bigger and better?
We recognize that it is a very competitive industry, but we are confident that we have the continuity of strategy and people, the capital strength and the franchise momentum to continue to gain market share, rather than give it back.
The first quarter was a very important test point for that. And we were either solid or gaining market share across every one of our businesses. We’re still gaining market share in prime brokerage, where a lot of banks are returning in an aggressive way. And in M&A, we topped the league tables for announced deals. It shows great momentum.
Q: You mention Q1 2010. Your numbers were good, but many competitors were better because of strong markets. You’ve made it clear that your strategy means earnings will be more stable through the cycle, but a lot of people criticized your results. Is the message getting through?
I think the first quarter was one of our best ever. It’s an interesting world where you can have a 23% return on equity, the highest among the global banks, and have people say it was a disappointing quarter.
We’re going to keep focusing on providing higher returns with lower volatility. We’ll continue to point out that our model is different, and that if there’s a period of asset appreciation, then those banks with a lot of assets on their books will get a boost.
Ironically, it was only a couple of weeks after those numbers came out that the crisis in the eurozone hit and assets started falling again. And I definitely think we are better placed to weather those storms.
If we can drive our performance through client business, and be there for them through both good and difficult times, then we’ll show consistently good returns. But this is not easy, it will require a lot of focus and will have to be proven for the long term. A few quarters is not enough.
Q: At the moment, the investment bank contributes 60% of earnings, wealth management 35% and asset management just 5%. Is that the right business mix for the future?
In an ideal world, the business mix would be 40/40/20, or around that. But earnings move around in different parts of the cycle.
We’d like to see asset management as a bigger part of earnings. It’s an important business, with very high earnings multiples, which we need to be really consistent in over a period of time. We need to build some platforms, such as in the alternative space. We’re taking the right steps and moving forward.
The private bank has been resilient in the past couple of years through a very difficult period for the industry as a whole. We have excelled in asset gathering. We are the clear leader in net new asset attraction – SFr44 billion in 2008 and SFr41 billion in 2009. Our organic growth corresponds to acquiring the assets of a medium-sized private bank. We are pleased with what this says about the trust clients place in us. We continue to see more opportunity in highly developed countries, such as the US, UK and Japan. But there’s a cyclical low in performance because customers have naturally been very conservative in the past two years. Given our increase in market share, as that business returns, we should see some very positive gains.
Q: Most banks are trying to make more of their private banks, and link them more closely to their investment banks. Are you ready for the challenge?
We think we do a better job than anyone else on this. We’ve worked for a long time on linking up our businesses to make sure we can deliver all of the bank’s services to all of our clients. You need the right people and the right systems to control and incentivize this collaboration. Over the last years, we have built those systems and have a clear lead over the competition. We publish our collaboration revenues, or revenues that come from one pillar of the bank and to another, and they have been over SFr5 billion for the past four years. Our ambition is to grow them to SFr10 billion in 2012, so we still have a way to go.
Q: How have you been affected by the attacks on Swiss banking?
It’s clearly had a short-term impact. But I think over the longer term Switzerland can be a big winner if you posit a level playing field around the world. If tax-compliant systems are equally applied worldwide, then Switzerland, with its stability, fiscal surplus, strong currency and level of service looks very attractive. We’ve actually seen that in the last couple of months. At the same time, we have built what we call a multi-shore platform, which allows clients to choose whether they bank onshore or offshore in different locations. We think that gives us the opportunity to serve them the best way we can.
Q: Where will the investment bank’s growth come from?
We still have a lot of growth opportunities. We think we’re well positioned to generate revenues as an integrated bank; we also see a lot of potential in emerging markets. We have more to do in commodities. We’re making good progress in rates and FX, but can do better.
Q: You’ve been a leader in transparency over compensation and also rewarding long-term performance. Have you benefited from doing so?
It’s clearly a complicated issue given all of the constituencies involved and also the competitive environment. Our Partner Asset Facility, for example, served the interests of our shareholders and our employees well. It was an innovative way to approach a difficult issue around distressed assets. We were the first full-scale adopter of the G20 proposals on compensation, even though the complexity of the treatment of different instruments doesn’t make it easy. We’ve tried, not always successfully, to come up with ways which give people incentives, but also are well aligned with our shareholders, in the context of a difficult public environment.
Q: The PIP plan, which just paid out after five years SFr3.1 billion to 400 staff, was transparent and over the long term. But you were still criticized when the payments were announced.
I think our approach to transparency has generally served us very well. If in any doubt, we disclose. It’s tough to put in place a long-term incentive plan and know how it is going to pay out five years later, and know what the reaction will be. We’ll continue to work on that. Some of the debate about the outcome of the PIP plan will certainly influence our thinking on this issue in the future.
Q: Your own payout was SFr71 million. Did you consider if that was appropriate for the current environment?
It’s difficult because there were a lot of variables in the programme, and even a few weeks before the plan closed it still wasn’t clear that there would be much of a payout at all. What we hoped was that the plan was seen by outsiders as an investment by senior management, for the long term, taken at a time when there was a lot of uncertainty about the industry and our own institution. What’s interesting is that if the top 30 banks had put in place the exact same plan in 2005, 25 of them would not have paid out under the terms of our plan in 2010. That shows the relative performance of the firm. Most of all, as part of the management team, I think that having the programme in place really incentivized us as a group to implement and see through the strategic plan we put in place. We were all focused on the long-term development of the business.
Q: That management team seems remarkably stable and tight-knit. How else have you achieved that?
As a management group, we have set some differentiated goals. One of them is our aspiration to be one of the most admired banks. It is a goal that makes you think longer term and not just on financial success. It may sound a little trite, but it is genuinely something we try to instil in our people to guide their thinking and behaviour towards clients and the broader community. We want to earn their admiration. We’re always thinking about how we can be better. The guys in our equity team have a great saying: “Be number one, but act like number two.” There’s no room for arrogance. We’re also working hard to develop a partnership culture. As a firm, you need a leadership group – and not just the executive committee, but all through the managing director level – who are really engaged in the enterprise and want to spend a good chunk of their career helping to make the organization evolve while they also progress their own careers. We try to ensure that the organization’s goals are more important than personal ambition. And it is not just about the CEO: we need leaders all throughout the business. You can lead from any seat.
Q: And do you remain committed to the business for the long term?
It’s funny. A lot of people say I should get the booby prize for timing on taking a global bank CEO job in May 2007. It’s been challenging, but we’ve made more progress over the last three years than perhaps at any time in the bank’s recent history. Our momentum is strong. It is great to see those initial results of our strategy. It is just the start. The course we set requires long term commitment – that is important for the firm and for the industry as a whole.
see also:
Calello keeps hitting the target
Mathers looks to the longer term
