Credit Suisse had a pretty good first quarter – apart from a $4.8 billion loss on exposure to a single client, family office Archegos, which called to mind the old joke about asking Mrs Lincoln how she liked the play otherwise.
In walking analysts through the bank’s results on Thursday April 22, chief executive Thomas Gottstein and finance head David Mathers tried to accentuate the positives.
Admittedly there will be another $650 million charge against Archegos in the second quarter and Credit Suisse is still not in a position to estimate how much its involvement with funds linked to failed lender Greensill will cost.
Wealth management performance was fine, nevertheless, and core investment bank businesses delivered results that would be cause for celebration in other circumstances.
Capital markets revenues surged to over $1 billion, for an increase of more than 500% compared to a weak first quarter of 2020, helped by strength in areas such as special purpose acquisition company (Spac) launches and a leveraged finance franchise that ranks second only to JPMorgan.
A long-term project to sell markets products such as equity derivatives to wealth management clients hit a new revenue record. Credit trading performed well.
Changes
Employees in these groups at Credit Suisse now have to evaluate two risks to their own future financial wellbeing.
The first is whether there will be a lagging impact on revenues – and related bonuses – from the recent risk management confusion.
There have already been changes to the prime broking division at Credit Suisse. Co-heads John Dabbs and Ryan Nelson have stepped down, to be replaced on a temporary basis by Roger Anerella. If other staff can secure positions at rival firms, it is probably safe to assume that they will go with the blessing of senior managers trying to pull off the difficult task of scaling back prime brokerage exposure without losing related equity sales and trading business from fund clients.
Other business lines may not see sharp immediate cuts to their exposure limits.
That brings investment bank employees to their second risk, however – the prospect that incoming Credit Suisse chairman António Horta-Osório will take a different view of the future than the chief executive he inherits, Gottstein.
In a presentation to media after the bank’s first quarter results were announced, Gottstein allowed himself a flicker of a smile as he acknowledged the significance of the input that will come when Horta-Osório takes up his new position in May.
“We will sit down together and have those discussions,” Gottstein said, drily.
Horta-Osório may disagree with Gottstein’s line that the asset management business at Credit Suisse is not for sale. He may feel that risk-weighted assets at the investment bank have to come down much more sharply. He may want to make bigger cuts to the variable compensation that goes primarily to investment bank employees than the $120 million announced for the first quarter.
[Horta-Osório] may feel that a new chief executive would be better suited to the task of restoring confidence in Credit Suisse
And above all he may feel that a new chief executive would be better suited to the task of restoring confidence in Credit Suisse.
Horta-Osório has been scrupulous in avoiding any public comment about Credit Suisse while he is in his final days as chief executive of Lloyds, but he is likely to have been consulted informally about the decision to replace Brian Chin as investment bank head with Christian Meissner.
The rapid ascent of Chin from a position running structured credit to head of the investment bank at Credit Suisse puzzled many both inside and outside the bank.
Chin seems to have convinced Gottstein’s predecessor Tidjane Thiam of his merits, despite substantial write downs in credit and structured finance positions soon after Thiam joined Credit Suisse in 2015.
Thiam confused analysts and investors in 2016 with what in retrospect probably indicated deep seated problems with risk management at the bank, when he hinted that he had not been aware of the scale of the troubled credit positions, before qualifying his remarks.
Chin nevertheless had another five years at Credit Suisse, rising to run first global markets, then the whole investment bank, before paying the price for the Archegos debacle.
Meissner has a different background, as an investment banker rather than a markets specialist, but he too had mixed results at his last senior job.
Meissner’s departure from a role as head of corporate and investment banking at Bank of America in 2018 drew sharply divergent media coverage of the underlying reason, indicating energetic background briefing by interested parties.
Was he simply punished for a loss of investment banking market share at BofA? Had he fallen foul of his one-time Goldman colleague Tom Montag, who as chief operating officer at BofA maintains effective control of banking and markets?
Or had Meissner been pushing for higher risk limits and tolerance of losses than Montag and chief executive Brian Moynihan would approve?
Cyclical
That last explanation will presumably not be one that Meissner features in any current narrative about his past career and plans for the investment bank at Credit Suisse. His staff will have to balance their own assessment of how the business will perform in the future with an honest evaluation of their prospects elsewhere. Veterans will be aware of the cyclical nature of finance.
Niron Stabinsky, who was recently awarded the dubious distinction of being dubbed ‘Mr Spac’ for his role leading Credit Suisse’s operations in a booming market that is now in the regulatory spotlight, might seem like a prime target for poaching by a rival bank. Stabinsky made a well-timed shift before, when he left a struggling Deutsche Bank in 2015 to join Credit Suisse.
But the Spac market itself is slowing down after a frenzied 2020 and start to 2021.
Leveraged finance – another area of strength at Credit Suisse – is also cyclical, as managers such as division head Jeff Cohen know. Securitized product and credit trading revenues also ebb and flow.
Stabinsky, Cohen, and other heads of strongly performing business units at Credit Suisse may hope to cut personal deals to commit to the franchise, although that can involve the equivalent of inhouse counterparty risk if someone further up the management chain is later replaced. (Credit Suisse declined to comment on behalf of business heads).
Team moves in banking have gone out of fashion since the go-go period 25 years ago when Bob Diamond led many of the top employees of Credit Suisse First Boston in his shift to Barclays Capital.
So current employees of Credit Suisse – whether they are high-earning business heads or the not-so-poor banking infantry – will have to make their own decisions about the risk/reward profile of staying with the firm.
