Credit Suisse’s New Boss Should Scare Investment Bankers
(Bloomberg Opinion) -- A company’s reputation is to all intents largely perception — but to get it to a better place, the reality has to be somewhat altered. No major bank’s reputation this year has suffered more this year than Credit Suisse Group AG. Incoming chair Antonio Horta-Osorio is tasked with restoring the Swiss institution to its former poise. But he doesn't actually have to do major surgery — just make all the right noises.
He certainly dropped a large hint in a recent meeting in London with senior bankers that the core focus is Credit Suisse’s private wealth management arm, and that by implication the investment banking arm is just one of several “ancillary services.” Ouch. But what did its investment bankers expect?
Credit Suisse has stepped on every available rake in recent years and has a major cultural problem with excessive risk. Horta-Osorio has got to been seen to talk tough and conduct a similar house-cleansing process as Christian Sewing has so far successfully been seen to have undertaken as chief executive at Deutsche Bank AG. But while there are major differences with Deutsche's calamitous record over the past decade, the solution for the Swiss champion is actually very similar.
It’s all well and good relying on the steady wealth management route, where Credit Suisse has a great brand, but it is not going to be enough. The competition here is fierce too, particularly in Asia which is the focus for everyone's growth plans. Despite Sewing’s 2019 declarations that Deutsche has returned to solid and less risky corporate business, the leopard hasn't changed its spots. The revelation in recent quarters has been the recovery in its investment banking fortunes.
The same route out is probably the smart option for Credit Suisse, as long as the reality — not just the perception — is that the toxic risk-taking culture has been reined back. Peripheral and marginally profitable or loss-making businesses will have to be jettisoned but the bulk of the investment bank can be easily salvaged.
Horta-Osorio built a risk-averse reputation at his previous employer (Lloyds Banking Group, a domestic U.K. bank with a very different profile to the more international Swiss wealth manager and banking conglomerate) but he certainly had a presence on the dealing-room floors. It is clear he intends to replicate that and hopefully utilize his sharp eye for overextended risk.
Now the pain has been taken with the 1.8 billion-Swiss franc ($1.6 billion) mandatory convertible bond capital raising, there is probably enough ballast onboard to steady the ship — as long as there is no repeat of its $5.5 billion Archegos disaster. That was an unforgivable lapse in risk management, strategy and culture — which funnily enough are the three areas that Horta-Osorio's much-needed business review is focusing on.
But it is not just shareholders who have to be reassured the worst is over. Credit Suisse’s client franchise has suffered some big knocks. Being able to pay back clients of its $10 billion Greensill supply-chain finance funds in liquidation would also help restore confidence in the business. Investors are still short of two-fifths of their money. Nonetheless, some analysts are starting to think the worst might be over with Berenberg upgrading the bank to a buy on Thursday, largely as it trades at a 26% discount to the sector.
Jobs and business lines will have to go but just as important is what is kept and nurtured. Many big hitters have already been lured away by competitors, such is the way of Wall Street. There will be more casualties before the bank becomes a magnet again for prospective bankers. But not all will be a loss and management has moved to lock in its key rainmakers where possible.
As long as another risk-driven disaster is avoided and the medicine is taken, then Credit Suisse has a future in investment banking. Enough capital is in place and the core wealth management business is rightly the focus. But that doesn't mean its investment bank can't shine again just as Deutsche’s has. It has just got to look and act like it has learnt its lesson that’s all.
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.
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