Credit Suisse Stumbles After Restructuring
Less than a year after emerging from a grueling restructuring, Tidjane Thiam is once again confronting missed targets and losses at businesses.
Credit Suisse Group AG cut its main profitability target for this year and next as trade tensions and negative interest rates cloud the outlook. Return on tangible equity -- a key profitability metric -- is set to be higher than 8% this year, compared with previous guidance of between 10% and 11%. The bank also said as part of its investor day on Wednesday that it expects to post a loss at its investment banking and capital markets business.
Thiam -- who struck a confident note earlier in the year -- is seeing returns from a streamlined and less volatile bank steadily decline because of slumping markets, a drop in dealmaking and ongoing uncertainty caused by global trade tensions. More positively, it joined lenders including Deutsche Bank AG and JPMorgan Chase & Co. in saying this year’s fourth quarter is better than a year ago and that it will stick with plans to return cash to shareholders.
Thiam is not alone in dialing back targets, or at least saying they may be more difficult to achieve, as banks across Europe grapple with negative interest rates and anemic growth. Deutsche Bank on Tuesday warned that its mid-term profitability goal now appears to be “more ambitious,” and it will rely more on volatile investment banking to reach its revenue target. Italy’s UniCredit SpA is cutting 8,000 jobs as part of its new multi-year plan to boost returns.
Since Thiam joined four years ago, he’s pivoted the lender to less volatile wealth management and away from trading, a strategy that has cut risk and enabled it to post more stable revenues. At the same time, the bank has posted losses at the markets business and tapped shareholders for billions of francs to strengthen capital. The shares have gained about 20% this year, but they are still are down 44% during his tenure.
What Bloomberg Intelligence Says:
The tough environment may merit further adjustment to its 2020 profitability target along with cost cuts.
-- Allison Williams, senior analyst
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Credit Suisse fell as much as 1.2% in Zurich trading and was down 0.4% at 12.88 Swiss francs as of 11:04 a.m.
Thiam six weeks ago gave a more downbeat outlook even as trading income surged, saying the U.S.-China trade dispute will lead to more cautious spending and investment decisions. Chief Financial Officer David Mathers said on Wednesday that the bank can reduce costs by 300 million Swiss francs ($304 million) next year if market conditions require such a move.
“Initial views on the new guidance are disappointing,” Thomas Hallett, an analyst at Keefe, Bruyette & Woods, said in a note to clients. He has an underperform rating on the stock. Analysts Andrew Coombs and Nicholas Herman at Citigroup were more optimistic, saying that a return on tangible equity improvement “looks feasible” next year.
The bank is pinning its wealth management growth on a strategy of cross-selling investment banking services to ultra-high net-worth clients while making better use of technology for more modestly rich customers. Philipp Wehle, who took over after Iqbal Khan’s acrimonious split from the lender this year, is carving out a new entity to serve the lower tier of the wealthy.
Slumping revenue at the investment banking and capital markets unit has become a growing issue for Thiam in recent quarters, while global markets trading -- a long-time straggler -- has made surprise gains. Global markets and the bank’s Asia Pacific business are showing “significantly better performances” compared with a year earlier, the bank said. The international wealth management business is “stable.”
Credit Suisse said it’s seeing pressure at the Swiss Universal Bank, the lender’s largest unit by profit. With negative interest rates of 0.75% on deposits in Switzerland, the bank has begun to pass on the costs to its wealthy clients, while it is also selling real estate to mitigate the effects.
At the investment bank, Credit Suisse lost out this year as a string of deals collapsed or didn’t get off the ground, including Chevron Corp.’s abandoned bid for Anadarko Petroleum Corp. Still, the bank has managed to retain it’s global top 10 spot for mergers and acquisitions and said it’s confident about its pipeline of deals.
Here are some of the other highlights of the bank’s investor day:
- Targets share buyback of as much as 1.5 billion francs next year, in line with previous guidance
- Cost base to be adjusted in 2020 depending on market environment
- Medium term ambition of 12%+ ROTE
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