Measured by the share price, October 27, 2022 is likely to go down in the history of Credit Suisse as a rather gloomy day: the share of the second largest Swiss bank fell by 15 percent on Thursday. Sure, for the fourth time in a row the bank has to report a quarterly loss, which alone would probably have been enough for a price drop. But the bank’s long-awaited restructuring plans, which were presented by CEO Ulrich Körner on the same day, caused much more turmoil in the financial world.
“This is a historic moment for Credit Suisse,” Körner said in the press release quote. Of course, he means it positively and sees the restructuring as a liberation that should finally lead Credit Suisse back onto safe ground after years of crises and missteps. But the announced cuts and measures are so severe that the market reacts optimistically to everything else.
What are Körner, his group management team and the board of directors planning? In a nutshell: reduce investment banking, raise fresh money through a capital increase, cut thousands of jobs. By and large, these steps were expected, but the cuts are deep.
Investment banking, which the bank has recently been repeatedly in the red and this time again recorded a pre-tax loss of CHF 666 million, is to be significantly restructured in the coming years. First, the bank’s advisory and capital markets business, which will be spun off, will operate under the revived First Boston brand. Secondly, the bank intends to sell most of the securitization business to the investment company Apollo Global Management and the Allianz subsidiary Pimco. Third: The “Markets” division, i.e. trading in stocks, currencies and bonds, will remain with the bank, but should be closely aligned with the needs of wealth management customers and Swiss business. And fourthly, the bank wants to outsource non-strategic, unprofitable and risky transactions to a processing unit. According to the plan, by 2025 the once large investment banking unit will have shrunk by 40 percent.
The second big announcement from Thursday concerns savings targets
According to Ulrich Körner, this restructuring will help make Credit Suisse a “simpler and more stable bank”. The departure of the previous head of the unit, Christian Meissner, also announced on Thursday, shows that the top management wants a fresh start, especially in investment banking.
The second major announcement from Thursday concerns the bank’s savings targets. Credit Suisse wants to reduce its costs by 15 percent to CHF 14.5 billion by 2025. This is to be achieved, among other things, with massive job cuts: in three years, only 43,000 of the 52,000 full-time jobs worldwide will be left. The bank wants to cut almost 3,000 of these jobs by the end of the year. The reduction is far-reaching – but Credit Suisse has to save if it wants to master the conversion. According to their own statements, the announced reforms alone will cost them CHF 2.9 billion.
So the bank needs money – which is why it announced a capital increase as a third measure on Thursday, as expected. With the issue of new shares, Credit Suisse wants to raise four billion francs. It’s probably this move that worried investors the most on Thursday: as the number of shares goes up, earnings per share go down. Raising capital is therefore an unpopular tool among shareholders, and analysts say it is now higher than expected at Credit Suisse.
In addition, the bank is once again getting help from the Middle East in its distress: During the financial crisis of 2008, it was saved by the Qatari sovereign wealth fund, which thus became the largest single shareholder. As part of the current capital increase, the Saudi National Bank now wants to invest in Credit Suisse. With the planned investment of CHF 1.5 billion, the Saudi National Bank will become a major shareholder.
There are big shifts that CEO Ulrich Körner and Chairman of the Board of Directors Axel Lehmann are setting in motion with this restructuring program. Ultimately, they are preparing to turn Credit Suisse into a small UBS: The largest Swiss bank, which, unlike Credit Suisse, had to be rescued by the state in 2008, has already undergone a similarly radical restructuring, investment banking has long since been scaled back and it is full focused on stable asset management. She has been reaping the rewards of this process for a number of years, and business is excellent.
Observers and analysts have long been saying and writing that UBS is a good example. Apparently, it took several scandals, missteps worth billions, a management team that was practically completely replaced and, last but not least, the two former UBS bankers Körner and Lehmann to finally put the advice into practice. The bank leadership describes the restructuring process as a “great journey” for which they have “the right people and the right focus” – a great promise after years of constant disappointment.
Credit Suisse customers recently withdrew 13 billion francs from the bank, such as from the Third quarter report emerges. This shows a strong distrust of the crisis bank – as well as the violent price reaction on Thursday. “We have to work hard to restore confidence,” Körner admitted on Thursday. Corporate culture will play a key role in this and whether Körner and Lehmann will finally succeed in breaking the power of investment bankers – in favor of much-needed stability, security and control.