Bank restructuring

Credit Suisse Rejects Deutsche's Route

suisse
Tidjane Thiam has opted to go his own way with Credit Suisse's restructuring plans.
  • Why it matters

    Why it matters

    Credit Suisse is suffering multiple problems, including a bloated investment banking balance sheet, high costs and weak growth.

  • Facts

    Facts

    • The new chief executive of Credit Suisse, Tidjane Thiam, revealed a radical restructuring program on Wednesday.
    • The bank announced a capital hike of 6 billion Swiss francs, or $6.3 billion, to boost its core capital ratio.
    • Its share price fell after the news, compounded by a third-quarter drop in net profit of 24 percent, to 779 million Swiss francs ($814.4 million).
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    Audio

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The new chief executive of Switzerland’s Credit Suisse bank, Tidjane Thiam, seemed irritated on Wednesday when a Swiss journalist asked him how he planned to grow the bank given that his plans seemed confined to cutbacks and divestments.

“It is not part of my job description – as agreed with the chairman – to have big plans,” said Mr. Thiam, who took over as chief executive in July. “This plan is a plan to succeed, it’s not a plan to be big.”

But Mr. Thiam’s ambition and the radical restructuring he announced on Wednesday failed to convince the media or the stock market. Credit Suisse’s share price slumped because the revamp details were compounded by disastrous third-quarter results with a bigger-than-expected drop in net profit of 24 percent, to 779 million Swiss francs, or $814.4 million. Analysts polled by Reuters had expected 921 million francs.

Mr. Thiam, like his rival John Cryan, the new head of Germany’s Deutsche Bank, faces a three-pronged challenge. The balance sheet of the investment banking operation is too bloated, the costs are too high and growth is too weak. Mr. Thiam has the additional problem that he needs to beef up his capital base as the common equity tier 1 capital ratio, a measure of a bank’s financial strength, is too low at 10.2 percent.

Like Deutsche Bank, Mr. Thiam is determined to cut costs, announcing savings of 3.5 billion francs by shedding 1,600 of the bank’s 17,000-strong workforce.

The executive, a former Ivory Coast government minister, has resorted to a surprising strategy to reinforce the bank’s capital. The 6-billion-franc capital hike is 2 billion francs lower than expected, but he will take in additional funds of 2-to-4 billion francs by floating up to 30 percent of shares in Credit Suisse’s domestic Swiss bank.

Andreas Venditti, an analyst at Bank Vontobel, said the initial public offering was the “most important news” in Mr. Thiam’s plan. The measures are intended to boost the core capital ratio by up to 13 percent.

That echoes Deutsche Bank’s plan to raise fresh funds through the flotation of its retail unit Postbank. But there’s an important difference. The Swiss domestic unit is an important, profitable part of Credit Suisse and contributed almost 50 percent of group pre-tax profit in the first nine months. Postbank, by contrast, is a low-profit retail banking network in need of restructuring.

A further difference is that Deutsche wants to divest itself of all of Postbank while Mr. Thiam wants to strengthen the Swiss unit through acquisitions using its shares as currency.

“If Credit Suisse had enough money, it would be able to finance these acquisitions without this flotation,” said Mr. Venditti. He pointed out that the bank will in future have to forego almost a third of profits from its Swiss business as a result of the IPO.

Like Deutsche Bank, Mr. Thiam is determined to cut costs, announcing savings of 3.5 billion francs by shedding 1,600 of the bank’s 17,000-strong workforce in Switzerland and reducing the headcount in its expensive London operation. It has a workforce of 6,600 in London, and will cut that by 1,800, either by laying off staff or moving posts offshore.

Banks Compared-01

 

Like Mr. Cryan, Mr. Thiam is dividing investment banking into two parts: advisory and trading. “The investment bank consumes too much capital and isn’t profitable enough,” he said. That’s something his predecessor, Brady Dougan, always denied.

Mr. Thiam’s job cuts are far less severe than at its domestic rival UBS. That disappointed many investors, but Credit Suisse has always had stronger roots in investment banking. It plans to reduce the balance sheet total of the division by a fifth and arrive at a leverage exposure of $491 billion by the end of the year. Deutsche Bank plans an exposure of around $660 billion according to plans announced so far, while UBS had an exposure of $270 billion at the end of the second quarter.

Events at Deutsche Bank this year have shown Mr. Thiam the consequences of coming up with a strategic plan that doesn’t have concrete targets — it cost Deutsche’s former co-chief executive, Anshu Jain, his job. Mr. Thiam hasn’t made that mistake.

He outlined plans to raise pre-tax profit from 4.5 billion francs this year to between 9 and 10 billion francs by 2018. Some 3-to-4 billion francs of that additional profit is to come from existing business operations. That means the investment bank would have to boost its profit by 1.3 billion francs — an ambitious goal indeed.

 

Holger Alich is Handelblatt’s Switzerland correspondent, covering the financial industry. To contact the author: alich@handelsblatt.com

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