Credit Suisse’s equity business under the microscope after earnings plummet

LONDON (Reuters) – Credit Suisse hosted its top clients at the luxury Fontainebleau Miami Beach hotel in October.

From BlackRock (BLK.N) to CBOE Global Markets (CBOE.Z), investors and merchants can chat with guests such as former President George W. Bush, network by the beachside pools of luxury hotels, We were treated in a fine dining restaurant. But it didn’t take long for the mood to turn sour, according to executives at the three-day conference.

As the sun rose over Florida on the second day, I returned to London to find the Swiss bank executives announcing the latest restructuring plans.

Confused by the $5.5 billion demolition of U.S. investment firm Archegos in 2021, exiting the hedge fund business and an unprecedented client outflow, Credit Suisse needs billions of dollars in capital to invest. Said it plans to spin off most of the bank, its stake in Tailspin.

At the Fontainebleau hotel, Credit Suisse bankers were confused by the announcement and worried their jobs were in jeopardy, said an unnamed executive.

In the weeks that followed, some of these bankers were laid off, and others, such as Doug Crofton, then head of the U.S. global equities division, left to join rivals.

What was once an important source of revenue for Switzerland’s second-largest bank has continued its spectacular collapse as some customers and investors pulled out, according to two people familiar with the matter.

Since then, Credit Suisse has struggled to convince investors that its overhaul would put the bank on a solid footing.

Peter Hahn, Emeritus Professor of Banking and Finance at the Bank of London Institute of Monetary Studies, said, “As long as there are no revenues and spending continues, there is no business.” You can improve the profitability of your business, but you can’t improve the profitability of a failing business.”

Asked by Reuters about the story, a spokesman for Credit Suisse in London said: “We never comment on rumors or speculation.”

Any other options?

Harris Associates, one of Credit Suisse’s largest shareholders in recent years, said it had sold its shares this week in a sign of investor anxiety. The firm’s chief investment officer, David Herro, told the Financial Times that he had grown impatient with the bank’s strategy to stem continued losses and customer exodus.

Under an overhaul announced by CEO Ulrich Koerner in October, trading will future serve the needs of the bank’s high net worth clients.

Trading, which accounted for 26% of the bank’s revenue in recent years, will account for around 15% of sales in the new streamlined format at the revamped Credit Suisse by 2025, the company said. increase.

However, according to the latest results from Credit Suisse, earnings from trading equities and bonds fell by 88% year-on-year in the last three months of 2022.

The decline in stock trading was particularly bad. In the three months to December, his earnings plummeted by 95% to CHF 18 million ($19 million).

Koerner told analysts in February that some of the investment bank’s losses were related to “deliberate risk aversion,” but didn’t elaborate.

The bank has set up a non-core division withholding some undesirable activities to wind down or sell, but it remains unclear which assets or portfolios will be moved.

But maintaining a streamlined form of equities wasn’t the only option the bank was considering, according to one of the people familiar with the matter and a third source.

When Credit Suisse was working on its turnaround plan last fall, the board didn’t formally consider the option, but management privately considered selling part of the equity business, according to people familiar with the matter. a person official said.

The option was not pursued because management thought it would be difficult to find a buyer, they said.

The complexity of releasing the technology platforms that enable stock trading and integrating them into another bank was another factor in Credit Suisse’s decision to postpone, the people said.

Credit Suisse declined to comment.

Mr Hahn of the Bank of London Institute of Finance said the fourth quarter’s slump made it difficult for banks to convince investors that they should continue to operate.

By comparison, earnings from equities trading at five of Wall Street’s largest banks fell by an average of 10% over the same period.

“Rocks and Hard Places”

Even after Credit Suisse stopped funding hedge funds after the Archegos implosion in March 2021, the equity business continued to make up a significant portion of investment banking revenue.

Credit Suisse makes a profit in equities by cutting the large amounts of equities it trades on behalf of its clients and building derivatives or complex financial products that are often sold to more sophisticated and wealthy clients. .

The sharp decline in fourth-quarter earnings included a steep decline in derivatives as customers shunned Credit Suisse after its credit rating declined, according to two people familiar with the matter.

In November, S&P Global Ratings downgraded the bank’s long-term rating to one notch above junk following revisions to some ratings by other credit agencies.

The downgrade has hurt the bank’s ability to attract customers seeking safer and more attractive alternatives, said three equity traders who create derivatives for rival lenders.

The stock market is dominated by big US banks such as JPMorgan Chase (JPM.N), Morgan Stanley (MS.N) and Goldman Sachs (GS.N), which are consistent with business and new technology. and have the means to invest in One of the options Credit Suisse is considering for him is to move equity research to his CSFB, according to Reuters.

CSFB aims to become a $3.5 billion “super boutique” by advising on transactions, including initial public offerings. CSFB can benefit from working with Credit Suisse stock bankers to find buyers for stocks.

Downsizing the equities business draws a further line under Credit Suisse’s investment banking ambitions.

“Given the enormous scale required to be economically viable, there is a big question mark over the importance of the equity business,” said Thomas Hallett, an analyst at Keefe, Brouillette & Woods. There is,” he said.

“The group is stuck between a rock and a hard place.”

($1 = 0.9409 Swiss Francs)

Additional reporting by Oliver Hirt, Noele Illien, and Sumeet Chatterjee.Editing by David Clark

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