Bad Credit

Breakingviews: Credit Suisse overhaul risks being a bad copy of UBS

The logos of Swiss banks UBS and Credit Suisse are seen at branches in Basel, Switzerland, March 2, 2020. REUTERS/Arnd Wiegmann

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LONDON, July 27 (Reuters Breakingviews) – Credit Suisse (CSGN.S) is finally facing the full extent of its problems. The $14 billion Zurich-based bank replaced chief executive Thomas Gottstein and Wednesday announcement this new broom Ulrich Koerner will reduce trading to focus on wealth management. The final plan, expected later this year, could resemble that of UBS (UBSG.S) from 2012 – but much slower.

Relentless losses, including $1.7 billion second quarter struck, made of Gottstein gradual strategy untenable. New Chairman Axel Lehmann wants Koerner to speed things up and cut costs to less than $16.1 billion from an annualized $17.5 billion this year. It will focus investment banking on advisory services like mergers and acquisitions rather than capital-intensive activities like credit trading, which have little relevance for wealthy clients.

This is similar to UBS’s strategy of October 2012, dubbed “strategic acceleration from a position of strength”. Former CEO Sergio Ermotti has pledged to cut about $90 billion in risk-weighted assets in investment banking, or 57% of its total, mostly in fixed income trading. By the following summer, the bank had returned to a valuation that exceeded its tangible book value, a sign that investors believed it could earn a respectable return on equity.

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Emulating that success is a huge ask for Koerner, who, unlike Ermotti, never ran an investment bank. It also faces a more difficult context. Global bank bond revenues rose in 2012, while M&A and underwriting fees remained broadly flat, according to data compiled by Citigroup analysts. By contrast, some of Credit Suisse’s key divisions, such as credit trading and leveraged finance, are falling off a cliff. Risky markets mean income hit by going out of business could be quicker and harder. And there could be fewer buyers for the exposures Koerner wants to eliminate, like the securitized products business with $20 billion in risk-weighted assets.

Meanwhile, the bank’s continued red ink is depleting its Common Tier 1 capital, which Koerner needs to fund its restructuring. Credit Suisse’s CET1 ratio fell to 13.5% in June from 13.8% in March. Assuming Koerner wants to stay above 13%, he only has a $1.4 billion buffer to absorb future losses from shutting down business operations. It might be safer to supplement this with a capital increase.

“Ermotti’s acceleration from a position of strength” at UBS was partly bluster, but it worked. Credit Suisse will struggle to do the same from its weak position.

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On July 27, Credit Suisse appointed Ulrich Koerner as managing director, replacing Thomas Gottstein, and announced plans to cut costs and offload assets from the investment bank.

The bank intends to cut its overall spending to 15.5 billion Swiss francs or less, against a median estimate from Refinitiv this year of 17.6 billion Swiss francs.

The board, led by chairman Axel Lehmann, also wants to get rid of about $20 billion of risk-weighted assets in the investment bank’s securitized products business, which focuses on mortgages and credit card receivables.

Shares of Credit Suisse rose 1.6% to 5.24 Swiss francs at 0802 GMT on July 27.

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Editing by Neil Unmack and Streisand Neto

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