Credit Suisse: Still more questions than answers
‘Business as usual’ has been tough for the Swiss bank to achieve over the last 12 months. Management faces a challenge to show the bank will not just survive but thrive.
This will be another testing year for Credit Suisse.
Back at the end of 2018, the Swiss bank declared that the three-year restructuring – during which it raised capital, de-risked the balance sheet and refocused away from trading businesses and more to managing the wealth of ultra-high net-worth (UHNW) clients and entrepreneurs – was over.
It had invested in risk controls. From now on, it would be business as usual.
A team of mainly long-serving Credit Suisse executives had achieved that turnaround, rescuing a firm renowned for periodic blow ups, under the steely gaze of a new chief executive, Tidjane Thiam.
In 2019, Thiam and his team would show what the new bank could do when the costs of running down problem assets no longer distracted from the operating results of the core businesses.
How did they fare?
For the first nine months of 2019, Credit Suisse was running at a 9% return on tangible equity, up from 6% for the first nine months of 2018. It grew underlying pre-tax income by 14% and, after paying out 50% of net income to shareholders through dividends and buybacks, increased tangible book value per share by 10% compared with a year earlier.
That’s respectable. But it is hardly shooting the lights out. At the end of last year, the stock was trading at 0.8 times book.
At an investor day in December, the bank guided that for the full year 2019 it will show a return on tangible equity above 8%. The bank has reduced its previously ambitious target of an 11% to 12% return in 2020, down to 10% for 2020, albeit with a medium-term aim of 12% plus.
It was a tough year for Thiam that will be remembered for the lurid headlines that accompanied the breakup of the executive team he assembled to execute the restructuring.
Iqbal Khan, former head of international wealth management, the business serving wealthy individuals in emerging markets outside Asia and in Europe outside Switzerland, quit for UBS in July.
News broke in September that Khan had confronted private detectives that Credit Suisse had set to trail him to ensure he was not poaching more staff. This looked wholly inappropriate and disproportionate – people move between the two big Swiss banks all the time.
The Credit Suisse board had to investigate. Briefly, Thiam’s position looked under threat, until chief operating officer Pierre Olivier-Bouée, who had previously worked with Thiam at Prudential and at Aviva, revealed that he alone had directed the spying operation of which the chief executive had no knowledge. He too resigned and, in an awful twist, one of the private investigators committed suicide. Next to all this, details of increasing tangible book value per share and of a common equity tier-1 ratio now likely to fall from around 12.4% to 12% in 2020 look rather mundane. But business goes on.
After hours of investor-day presentations by executives from across the bank, Thiam summed Credit Suisse up in one short sentence: “We are an AuM [assets under management] growth and capital reallocation story.”
The good news for Credit Suisse, having decided it should be first and foremost a leading wealth manager with certain investment banking capabilities attached, is that the wealth business is enjoying strong growth, partly thanks to asset price inflation and growing inequality that benefits its favoured clients.
The personal financial assets of wealthy individuals across all emerging markets stood at $9 trillion in 2007. That had increased to $26 trillion by 2018, with the bank expecting compound annual growth of 8% from 2018 to 2023. In the first nine months of 2019 it brought in net new assets of SFr72 billion ($73 billion), bringing the bank’s total assets under management to SFr1.5 trillion.
This is the core of Credit Suisse.
But it continues to face questions over the investment bank. Here too there have been changes to Thiam’s team. During the restructuring he cut trading businesses, especially macro rates and focused on equities and credit. The global markets business has done surprisingly well recently, producing higher profits on much lower risk, with pre-tax income for the first nine months of 2019 up to $914 million from $365 million for the same period of 2018.
However, the bank focused its investment banking and capital markets businesses in the US and Europe on equity capital markets, leveraged finance and M&A, which were all down in 2019. That business will record a loss for the year. Former head of investment banking and capital markets, Jim Amine, has stepped into a new role, another casualty from the team that led the restructuring.
The focus now is all on finding new ways to apply investment banking and global markets capabilities to UHNW clients. Thiam says: “It’s about increasing wallet with existing clients, not chasing new ones.”