Credit Suisse Asks for One More Year as Thiam Touts Returns

(Bloomberg) -- Six months ago, Tidjane Thiam was still asking Credit Suisse Group AG shareholders to pitch in billions of francs to strengthen the bank’s capital buffers. Now he’s talking about returning cash.

The lender on Thursday outlined plans to return half of its profit, mainly through buybacks or special dividends, once it strengthens capital generation in 2019 and 2020. In a reminder that the path there may continue to be bumpy, Credit Suisse abandoned a profit target for its Asia-Pacific unit and warned that market conditions for its trading operations remain difficult in the final months of this year.

Thiam is seeking to persuade investors to stick with him for the final year of his turnaround plan, after tapping them for more than 10 billion francs since he first announced his strategy in 2015. While cost cutting is ahead of plan, surprise trading losses and a lack of volatility in markets have hampered revenue growth, and an activist investor recently started to campaign to break up the bank. Thiam said in an interview this week that he was “painfully aware” of the tough times shareholders have endured and signaled rewards are in store.

“The shareholders have been through a lot,” Thiam, the bank’s chief executive officer, said in an interview two days ago. “As we generate more profit and the bank does better,” he said, “the goal of all this is to return capital to shareholders.”

Credit Suisse rose 2.5 percent at 4:06 p.m. in Zurich trading to 16.75 francs, its highest level since January last year on an intraday basis. The stock has lost about 28 percent since Thiam announced his turnaround plan in October of 2015.

Payout Target

The payout target would bring the Zurich-based lender in line with cross-town rival UBS Group AG, which has pledged to return at least 50 percent of net income to shareholders as long as a measure of capital strength doesn’t fall below a set minimum. Credit Suisse hasn’t paid a special dividend since at least 2006, and stopped doing buybacks in 2009.

The lender, in a statement release before its investor day in London, confirmed profit targets for most of its key divisions including the Swiss Universal Bank, International Wealth Management and Investment Banking & Capital Markets, businesses. The bank is abandoning its target for 1.6 billion francs of pretax income at its Asia Pacific business, according to spokesman Adam Gishen.

For more on the troubles of the Asian trading business, click here.

Credit Suisse warned about the outlook for its market-dependent businesses, with trading conditions in the fourth quarter “broadly similar” to those in the third. Volatility, the bank said, remains at historically low levels. That and a widening of spreads in the high-yield market is weighing negatively on the performance of both its Global Market and APAC markets, with the bank saying it expects an adjusted pretax loss in its APAC markets business broadly in line with last year’s fourth quarter.

Beating on Costs

Thiam, a former insurance executive, has made cost cuts a major pillar of his strategy, focusing the restructuring on trading operations in New York and London where he’s cut positions and reduced capital allocation to a markets division which today focuses on equities and credit trading. The bank said it may beat a target for its cost base of below 18.5 billion francs for this year on an adjusted basis and confirmed its ambition to reach a level lower than 17 billion francs for 2018.

For 2019 and 2020, Credit Suisse sees a total cost base of between 16.5 billion francs and 17 billion francs. The bank is also seeking to achieve a return on tangible equity of 10 percent to 11 percent for 2019 and 11 percent to 12 percent for 2020. That measure stood at 4.1 percent for the first nine months of this year. Its also targeting a CET1 ratio -- a key measure of financial strength -- of above 12.5 percent from 2018 to 2020.

Credit Suisse is also betting on technology, where it sees the potential for cost savings. “For example, we aim to implement more robots and to increase the share of operating systems on the cloud by 2020,” the bank said, adding that from 2019 onwards those measures will result in incremental annual productivity gains of around 600 million francs to 800 million francs over the course of 2019 and 2020.

Bad Bank

“We like the progress on automation and the ambition of the plans ahead,” Morgan-Stanley analysts led by Magdalena Stoklosa said in a note to clients. The faster wind-down of the bad bank will help to deploy capital to “higher yielding wealth management businesses."

Credit Suisse said its confident of completing the wind-down of the strategic resolution unit and lowered its 2019 adjusted pretax loss target to about $500 million from $800 million previously. The closure of the unit, a dumping ground for assets that no longer fit the bank’s strategy or trades that went sour, is one of the key tasks for Credit Suisse to complete.

The SRU unwound 191,000 external derivative trades last year. Assets offloaded include a credit default swap portfolio -- insurance contracts that pay out if a borrower defaults -- sold to Citigroup Inc. and $3.1 billion in loans acquired by a U.K. pension plan.

To contact the reporters on this story: Jan-Henrik Förster in Zurich at jforster20@bloomberg.net, Patrick Winters in Zurich at pwinters3@bloomberg.net.

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Christian Baumgaertel

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