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Credit Suisse Group AG hit rock bottom in 2022, or so anyone involved will hope. Years of lurid scandals and frightful losses finally culminated in a full-blown crisis of confidence that saw its share price hit a record low.
Chairman Axel Lehmann’s radical restructuring plan came in late October with the bank battered by a panic about its viability. It just about won enough support to raise 4 billion Swiss francs ($4.3 billion) of new capital through share sales. That has bolstered the lender’s balance sheet, for the short term at least, but the share price is at a sickly 80% discount to forecast book value.
Like Deutsche Bank AG in the middle of the last decade, Credit Suisse has tripped itself into a downwards spiral in which failing client, staff and investor confidence leads to revenue losses, higher costs and tumbling profitability. It’s a chronic condition, but can be reversed as Deutsche Bank is slowly proving. Here are five things Credit Suisse must do quickly.
Complete its first big exitThe bank has signed a deal to sell a large part of its Securitized Products Group, which packages and trades bonds made up of loans and mortgages, mainly to Apollo Global Management Inc. Still, it’s not yet clear how much Apollo will pay for the teams and assets it is buying and what boost to Credit Suisse’s capital base will result.
There is also confusion over why Credit Suisse is keeping $20 billion of the unit’s assets. The answer could turn out to be a clever solution to a tricky problem. Apollo will manage those assets for Credit Suisse, providing the bank with some investment income for a few years. This is meant to cover costs that Credit Suisse can’t shed quickly, such as the administrative and IT expenses that the sold business shares with the rest of the bank. Investors need to see what this income will be and how quickly the back-office costs it is meant to cover can be cut.
Get rich clients onsideCredit Suisse suffered a shocking outflow of money from wealth management in October — nearly $90 billion, or 6% of group assets under management, mostly from international clients. Lehmann has said those outflows have stopped and some Swiss clients have brought money back.
The spark was a social-media panic about its viability, but Credit Suisse has also made itself less attractive. To reduce its own risks, it tightened lending terms for clients who want to juice their investments with leverage. It has also lost senior private-bankers to rivals.
To stop the leaking, the bank needs to cheer the staff who get revenue out of clients so that they will work hard to give those customers the best service and investments that Credit Suisse can afford. Many client relationships are a complex set of loans, collateral and investments that take time and effort to unwind. But if neither bankers nor clients feel good, assets and revenue will keep declining.
Invent CS First BostonThere are so many questions about Credit Suisse’s plan to spin-off its investment bank advisory business and relaunch it as CS First Boston. How will this fund itself and at what cost? Who is going to invest in it and how much will Credit Suisse own? How is it going to absorb M Klein & Company, the private advisory boutique of Michael Klein, the veteran dealmaker set to become its chief executive? Ultimately, all these questions are really about how much revenue Credit Suisse is likely to get from CS First Boston and what cost and capital commitments it will have to bear in return.
Get the cost base rightHow many people, offices and computers does Credit Suisse need for what it wants to do? This sounds like the easiest bit, but there’s a massive wrinkle for any bank: Funding costs. These often rise at exactly the moment when a bank is losing revenue; and when bankers and clients are most worried about its business. Higher funding costs make a bank’s products less competitive, too, adding to its problems. The capital raise has helped, but the bank needs to prove it can make steady profits and restore confidence before its funding pain will ease.
Credit Suisse needs credible revenues that it can set against its costs. But the state of financial markets and appetite for trading and dealmaking is out of its hands. Investment banking was built on low salaries and big bonuses partly to account for this problem. Credit Suisse has to ensure staff costs are as flexible as possible at a time when it is fighting to stop good revenue-earners leaving, trying to attract better risk and compliance teams and dealing with general inflation.
Don’t #%c& up! This is famous advice that all should heed. Everyone involved will feel better about Credit Suisse when it stops shooting itself in the foot. So it shouldn’t add to the pile of legal cases against it, make no more big losses on bad clients or criminals and just never spy on anyone ever again.
If it can do this and show its stock and debt investors a steady and believable outlook for revenue, then its funding costs should start to fall and its share price rise, kick-starting a virtuous circle of recovery. Credit Suisse’s refrain for 2023: No alarms and no surprises, please!
More From Bloomberg Opinion:
Credit Suisse Investors’ Choice: a Big Loss or a Bigger Loss: Paul J. Davies
Credit Suisse Gives First Boston a Second Chance: Matt Levine
Why WFH When You Can Live in the Office Like Musk?: Chris Hughes
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.
More stories like this are available on bloomberg.com/opinion
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