Q1 results: Let’s hope Credit Suisse is a one-off
The Swiss bank is still paying for its misdeeds, but this might be a taste of what’s to come for others.
It has blamed dreadful first-quarter results on reduced client activity in volatile markets. Normally, banks benefit from moderate volatility, but extreme risk aversion shrinks revenues and leaves high fixed costs. If that now unfolds, Credit Suisse might have provided an early and unpleasant taste of what’s to come.
The Swiss bank had already prepared shareholders for bad news by pre-announcing a first-quarter loss largely due to a SFr600 million ($617 million) increase in litigation provisions for cases originating a decade ago.
But when it reported full results one week later on Wednesday, Credit Suisse still managed to disappoint. The surprise wasn’t the lingering costs from years of misdeeds – rather it was the hefty underlying decline at its key businesses of wealth management and investment banking. Only the domestic Swiss retail and commercial bank held steady.
After taking out those litigation provisions as well as a big mark-to-market hit on its holding in Allfunds, the bank eked out an adjusted pre-tax profit of just SFr300 million in the first three months of 2022.
Analysts had expected closer to SFr1 billion.
The bank used to champion GTS. It now starts to look like a bull-market play
Even on an adjusted basis, the investment bank recorded a loss of SFr55 million. That’s a shuddering fall from a SFr2.374 billion profit in the first quarter of 2021.
Partly it’s down to the business mix. Credit Suisse is strong in leveraged finance, structured products and equity capital markets (ECM), notably being a leader in special-purpose acquisition company (Spac) IPOs: all businesses hard hit by rising rates, fears of recession and the war in Ukraine.
Perhaps more worrying, pre-tax adjusted profit was fully 74% down in wealth management compared with the first quarter of 2021. As well as lower net interest income and fees thanks to a 9% reduction in client activity, wealth management also suffered a 38% decline in revenues at its global trading solutions (GTS) joint venture with the markets businesses in the investment bank.
The bank used to champion GTS. It now starts to look like a bull-market play.
The problem here is not residential mortgage-backed security (RMBS) cases from a decade ago: it is Archegos and Greensill. Credit Suisse has had to rein in its own risk appetite, just as client activity also declines. And operating expenses are up by close to 10%. It must keep investing heavily – SFr150 million in the first quarter alone – in the risk-management infrastructure that it should have had all along.
More annoying is the rise in compensation. The bank cut overall pay in response to last year’s scandals and increased the deferred component. But that’s not sustainable. You can’t keep deferring compensation into the years ahead. And other banks are doing OK, so can lure good people away. Higher cash-compensation accruals added another SFr214 million to costs in the first quarter.
It is no wonder that almost all the executives and board directors that oversaw the bank at the start of last year have been replaced, though the impending departure of chief financial officer David Mathers, who persuaded the board to recapitalize the bank with mandatory convertibles this time last year, is a blow.
At least he will stay until his replacement is found.
If Credit Suisse is a unique story, it may yet end with the bank being acquired. It is cheap enough. But if it points the way for the year ahead, the whole industry should be worried indeed.