Credit Suisse Group AG has had a deep infestation for years and the critters just keep coming. (Representative image)
When you see one cockroach, you can be pretty sure there are more under the floor or in the walls. It’s often like that with companies and bad news, too: That’s the cockroach theory in markets. A minor scandal, a surprise loss, a litigation charge: Any one of these can leave a seasoned investor nervous that more trouble will scuttle out.
Credit Suisse Group AG has had a deep infestation for years and the critters just keep coming. The latest is the odd story that a former employee stole staff salary and bank-account data several years ago. It’s yet another reason to cringe after disappointing results for 2022 last week, which have led to another round of cuts to profit forecasts from analysts.
Twelve months ago, Credit Suisse was expected to make 1.38 Swiss francs ($ 1.50) per share in adjusted earnings in 2023, based on an average of analyst forecasts collected by Bloomberg. Three months ago, that was 0.38 francs. Today, it’s a loss of 0.16 francs. The debate is now whether the bank can turn a profit in 2024. Analysts at Barclays Plc expect underlying losses even into 2025.
Investors were hoping for a V-shaped profits recovery after the radical restructuring launched by Chairman Axel Lehmann last October, according to Citigroup Inc. analyst Andrew Coombs. The latest results and Credit Suisse’s assessment of the challenges ahead suggests any recovery is more likely to be U-shaped, or even tending towards L-shaped, he added.
Credit Suisse shares dropped heavily after results; and the cost of insuring the bank’s bonds against default jumped once more after having recovered somewhat through January. This directly affects profitability by pushing up the bank’s cost of funding. On a recent bond sale, Credit Suisse had to offer much higher yields than rivals to attract buyers — in fact, more than twice the credit spread of similar deals this year.
When did the first roach appear? It was most certainly created by a series of bad decisions, incentives, or targets from management. Credit Suisse had troubles galore after the 2008 financial crisis, but so did every Western investment bank. Huge fines and litigation provisions were common in those years. The Swiss bank was also hit for helping US citizens evade taxes, as was local rival UBS Group AG.
When Tidjane Thiam took over from Brady Dougan as chief executive officer in 2015, his mission was to draw a line under such problems and make profits less volatile. The aim was to focus on steady fees from running money for the rich, especially in high-growth Asia. Thiam raised more than $ 6 billion in fresh equity to help reshape the bank, but decided against major changes to the investment bank, opting instead to nip and tuck.
It backfired. Within nine months, the investment bank had taken $ 1 billion in losses on junk debt trades. The restructuring was extended but still wasn’t as far reaching as it should have been. Over 2015-2017, it reported 6.65 billion Swiss francs of cumulative net losses. US regulators also started investigating debt funding for tuna fishing boats in Mozambique that Credit Suisse helped arrange between 2013 and 2016. The bank eventually paid $ 475 million in settlements in 2021.
Thiam was ousted three years ago after a scandal over the bank spying on a former senior executive — perhaps one of the most astonishing events at Credit Suisse in recent years. Perhaps. In 2021, the year after his departure, it suffered by far the biggest loss of any broker in the collapse of Archegos Capital Management LP, a sort of hedge fund that operated with vast leverage. Hot on the heels of Archegos came the Greensill Capital funds scandal. A thorough review of all that has gone on would require a book. Or two.
Thomas Gottstein and Antonio Horta-Osorio, briefly CEO and chairman respectively, struggled to get a grip, stop the bad news and chart a better course. They still couldn’t kill the cockroaches.
Now, Lehmann and his new CEO Ulrich Koerner are attempting a much deeper clean and repair job. Their radical restructuring plan — which previous leaders dodged — is the right call. I have argued this for years, along with many other critics. The duo have raised (more) fresh capital to fund the transformation. That drove hopes they could get it done quickly and cleanly. But there always seems to be something else creeping out.
To be fair, it is only a little over three months since Lehmann and Koerner launched their reforms. The bank made a great start: It sold its US-mortgage bond and structured credit trading business to Apollo Global Management — or much of it anyway. Credit Suisse still hasn’t revealed how much revenue and cost will go in the sale, or what the remaining markets businesses will look like. So, two cheers.
The plan to recreate a Credit Suisse First Boston advisory business is somewhat messier. It is paying $ 210 million for the deal-making firm of Michael Klein, who was already a non-executive director at Credit Suisse since 2018, but swapped that to become chief executive of CSFB. The focus and financing of CSFB are still being worked out. By the end of 2024, Credit Suisse says it should be spun-off privately, or publicly listed. Whether either happens will depend on the state of markets.
Lehmann and Koerner’s headline target is for Credit Suisse to hit a 6% return on tangible equity in 2025. That is underwhelming in itself, but the missing information on CSFB and the partial Apollo sale makes it impossible to judge whether the bank’s new leaders are underpromising, or being wildly optimistic.
Trust is key and Credit Suisse has little left to squander. A social media storm over a feared Lehman Brothers moment in October led to shocking asset outflows from its wealth management arm. Then last week, investors learned negative momentum in November and December even if at a much slower pace. That has hurt credibility because Lehmann had told Bloomberg TV at the start of December that outflows “basically have stopped” and money was “gradually coming back in particular in Switzerland.” He may have been right at that very moment but it hasn’t played out well.
Credit Suisse’s new leaders have made a fast start on a hugely disruptive restructuring, but there is still too much information missing and too many unanswered questions. Lehmann and Koerner need to fill in the gaps quickly – and somehow prove that the bad news cockroaches are finally being exterminated.
Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Views are personal and do not represent the stand of this publication.
Credit: Bloomberg
