Tidjane Thiam, who is revamping Credit Suisse, now also faces
upheaval tied to Brexit
By John Letzing
ZURICH -- A year after he took the helm at Credit Suisse Group
AG, Tidjane Thiam's already-fraught attempt to revamp the Swiss
bank faces a new hurdle: market turmoil sparked by the U.K.'s
Brexit vote.
Exactly one year ago Friday, Mr. Thiam, a former consultant and
insurance executive, became CEO of the bank, at a time it faced
growing calls to curb its reliance on volatile, and costly,
investment-banking operations. In October, he unveiled a plan --
later expedited -- to scale back the investment bank by selling off
assets such as complex debt instruments as quickly as possible.
But problems mounted almost immediately. Credit markets soured
late in the year. The bank announced big, surprise trading losses
in March. Mr. Thiam's handling of investment-bank cutbacks proved
controversial internally. During his tenure, Credit Suisse's shares
have lost nearly 60% of their value -- slightly worse than the
performance of Deutsche Bank AG, another European bank struggling
with an overhaul, and notably worse than Swiss rival UBS Group AG.
The Stoxx Europe 600 bank index is down nearly 40% over the same
period.
Mr. Thiam said in an internal memo sent prior to the U.K. vote
that much of the stock's woes are due to short sellers betting --
incorrectly, he said -- that Credit Suisse will need to raise
additional capital.
The bank's protective capital is mandated by regulators to
ensure stability; a fall below a certain level means complications
for holders of some of Credit Suisse's debt. The bank's buffer has
recently been compared unfavorably with that at UBS. Analysts at
UBS said on Wednesday that now, following the Brexit vote, Credit
Suisse may have to ditch paying a cash dividend for a while, in
order to help it continue rebuilding its capital cushion. A
spokeswoman for Credit Suisse declined to comment.
There are other ways the vote, and uncertainty about its impact
on markets, is expected to make Mr. Thiam's job harder.
Wealth-management clients may avoid turbulent trading conditions
and let their assets sit dormant, starving Credit Suisse of fees,
analysts say.
The Brexit vote may also hinder one of Credit Suisse's core
missions at the moment. It is continuing to try to slim its
investment bank, and overall balance sheet, by selling off
relatively high-risk, debt-linked assets that have weighed it
down.
"The prices they get now are not what they could have gotten a
week ago, " said MainFirst analyst Tomasz Grzelak. "The question is
whether there's anyone willing to buy this stuff in the market,
because if you don't know what's going to happen in the coming
months, you don't want to add risk."
A Credit Suisse spokeswoman said in a statement on Thursday that
by the end of the first quarter, the bank had made "significant
progress" in reducing risk-weighted assets, fixed costs, and risk.
"We remain on track," she said.
Many investors like the idea of Credit Suisse dumping
investment-bank business. These investors have a preference for
fee-based, capital-light businesses like managing portfolios for
private-banking clients. But Credit Suisse's evaporating market
value has caused even the bank's strongest boosters to become
reflective.
David Herro, the chief investment officer for international
equities at Credit Suisse's largest investor, Chicago-based Harris
Associates LP, was in Zurich during June to meet with Mr. Thiam.
Sitting in a café near Credit Suisse's headquarters after that
meeting, Mr. Herro said he supports the CEO's stance on investment
banking, adding that he thinks traders' interests had become
misaligned with those of the bank's investors. Internal conflict as
a result is acceptable, he said.
But Mr. Herro also reeled off challenges shared by Credit Suisse
and other European banks, including negative interest rates, which
can crimp profits. That made Credit Suisse's particularly steep
stock dive hard to swallow, for someone betting heavily on a
successful turnaround. He said with a wry grin: "I don't know,
maybe I'm wrong. It's happened."
UBS provided an example of how difficult it can be to dump
investment-banking business, even in more hospitable conditions.
UBS's effort kicked into gear in late 2012, at a time when European
Central Bank President Mario Draghi had pledged to do "whatever it
takes" to keep the euro together. That calmed jittery global
markets.
Still, UBS has endured a thorny, and lengthy, wind down. "On a
proportional basis, we'd be in the ninth inning" of the reduction,
UBS Chief Financial Officer Kirt Gardner said in an interview in
early June. "Unfortunately, it's going to be a long ninth
inning."
In 2013, UBS's noncore and legacy portfolio, designed to sell
off investment-bank assets, generated 2.3 billion Swiss francs
($2.35 billion) in pretax operating losses as employees scrambled
to unravel business built up over decades. Much of the portfolio
held counterparty positions, where the bank bet one way on interest
rates over long periods, and now had to encourage the party on the
other side of that bet -- often clients that UBS didn't want to
alienate -- to let UBS walk away.
UBS says it can now sit on much of the assets left and wait for
buyers, rather than peddling them at losses.
That may not be the case for Credit Suisse, analysts say. The
lender has been dumping chunks of investment-bank business that it
intends to sell off into a separate wind-down unit unveiled last
October, which also includes costs and unwanted parts tied to other
units, and held 62 billion francs in risk-weighted assets as of
late last year.
More recently, the bank has had to add to the pile. Credit
Suisse surprised investors and analysts in March with news that
problematic debt-trading positions in the investment bank had
caused large write-downs in the fourth quarter and the first
quarter and meant the lender would dump as much as $15 billion more
in risk-weighted assets to the wind-down structure.
Even prior to the Brexit vote, analysts were skeptical that
Credit Suisse could press ahead with the asset shedding in a timely
way, and without heavy losses.
"Investors who are waiting for a quick selloff [of unwanted
business] at a reasonable price will probably be disappointed,"
said George Karamanos, an analyst with Keefe, Bruyette &
Woods.
Write to John Letzing at john.letzing@wsj.com
(END) Dow Jones Newswires
July 01, 2016 02:47 ET (06:47 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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