Credit Suisse Has Some Painful Choices to Make

Credit Suisse Group AG is suffering serious financial pain after stepping on several rakes at once. It should be able to cope, but it can’t afford to put another foot wrong. The Swiss bank’s global wealth business is its most prized asset and there’s a danger that its reputation — especially among Asian and Middle Eastern clients — will be contaminated by the lender’s woeful risk management, revealed by its exposure to last month’s blowups of Greensill Capital and Archegos

New leadership is on the way with Antonio Horta-Osorio taking over as chairman imminently. Just as important, the experienced former Bank of America executive Christian Meissner is stepping up to take control of the ailing investment bank. Chief Executive Officer Thomas Gottstein has survived thus far because he’s relatively new to the job, but it’s been the worst possible start to his reign. On a conference call on Tuesday, the CEO pointed to Horta-Osorio’s arrival as a chance to reassess the bank’s strategy, according to Bloomberg News.

With a series of firings across the company after the Archegos and Greensill mishaps, almost an entire cadre of senior bankers has been stripped out. The immediate need is for strong leadership to steady the ship and keep hold of the best performers during a dark moment for the firm. A first-quarter pretax loss of 900 million swiss francs ($960 million), a two-thirds cut to the dividend and a suspension of share buybacks are bad enough. The real risk to staff retention is that the bonus pool will have to be cut significantly.

To shore up employee and shareholder confidence, Credit Suisse should kitchen-sink all of its problems and make a statement of intent about what it will look like in the future. While having to write down $4.4 billion is calamitous, the lender would have made a decent start to the year otherwise. Its core equity tier-one ratio is still 12%, according to the company, and a liquidity coverage ratio above 200% means it’s fundamentally sound.

However, the losses from its Greensill-backed supply chain finance funds or its Archegos exposures may not be fully quantified, including any potential regulatory and legal exposures. So the pain could get worse. Nonetheless, by the end of 2021 these episodes could be largely in the past, as long as Credit Suisse seizes this moment to adapt its risk-taking culture.

It may want to think carefully about its commitment to special purpose acquisition companies (SPACs). Credit Suisse has been one of the most aggressive underwriters of this bubbly segment of equity capital markets.

Moving beyond the Greensill debacle will be expensive but relatively straightforward. Supply-chain finance isn’t vital to the bank. The tricky decision will be how Credit Suisse balances its duty of care between shareholders and the exposed fund investors. Any decision not to make those investors whole would reverberate across its private-wealth and asset-management businesses. Reputations take decades to build and moments to lose, and the Swiss bank’s most stable route to growth is adding private and institutional client monies.

The strategic calculation on the Archegos aftermath is thornier. Prime brokerage services to hedge funds, and family offices, are a core business fundamental to the Credit Suisse investment bank — it cannot operate practically without access to the most active and (usually) profitable clients.

What must worry senior management most is how it was left holding the biggest Archegos losses when more fleetfooted rivals had long left the building. Putting aside the failures of counterparty-risk assessment, the bank didn’t react quickly enough and didn’t have adequate collateral. Only after a further fire sale on Monday was Credit Suisse able to put a number on its losses, a week after most of its rivals. 

This is shaping up to be another banner year for investment banking generally, so Credit Suisse looks doubly foolish. Its fellow Swiss champion UBS Group AG is performing well, highlighting the gulf that has grown with its closest rival. Rumors of a merger of the two are rarely far away. Private equity could also pounce at a moment of weakness. The new management must start taking proactive action, now.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

©2021 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.