In response to investor concern over a falling stock price and raised credit default swap rates, Credit Suisse announced an overhaul to its strategy on 27 October 2022. Following the announcement, shares dropped by a record-breaking 19%, the largest single-day decline on record.
The strategy – which Credit Suisse called “radical”, “decisive” and its “blueprint for success” – will see the Swiss bank look to tap 20 banks to underwrite newly issued shares in a bid to raise $4bn to fund the new restructuring plan.
Credit Suisse looks to raise billions from overhaul
Participating banks in this strategy are believed to include Saudi National Bank (which has committed to approximately $1.5bn), Goldman Sachs and BNP Paribas. By 1 November, approximately $1.8bn had been pledged by several investors. As a result, Credit Suisse shares increased slightly, by 2.2%, showing the beginnings of recovery for the bank – however, there is still a long road ahead.
In October 2022, Credit Suisse’s market value dipped to below $10bn, a staggering fall from its $50bn valuation less than five years ago. Many experts are dubious about the potential success of the restructuring plan, highlighting that the bank’s bad track record when it comes to legal issues (Credit Suisse settled a French tax fraud probe in October for $238m) and its high turnover of senior staff have dampened investor faith.
Furthermore, as part of the restructuring strategy the bank plans to cut approximately 9,000 jobs with 2,700 estimated to lose their jobs before Christmas (or, as Credit Suisse put it, being subjected to “organisational simplification [and] workforce management”). Many of the job cuts are expected to be in European corporate finance. This move is expected to shrink the bank’s overall cost base by 15% by 2025.
Spinning off investment banking
Alongside setting up a ‘bad bank’ unit for high-risk assets that Credit Suisse hopes to eliminate, there are also plans to shift away from investment banking, including a spin-off for its investment arm under the CS First Boston brand.
The spin-off – which is headed by Michael Kline, a Citi veteran – will be based in New York and is being positioned as a boutique business, albeit a very large boutique, serving international clients. Credit Suisse CEO Ulrich Körner explained that CS First Boston will operate “like the old days” and suggested that employees of the spin-off will hold a lot of stock in the firm.
Despite Credit Suisse’s investment bankers seemingly benefitting from the spin-off, the strategy aims to radically downsize its investment banking and trading operations. Credit Suisse chairman Axel Lehmann highlighted that the bank will be more focused on wealth management moving forward. In an interview with Bloomberg, Lehmann stated: “Going forward, Credit Suisse is really a wealth management-centric franchise, centred around entrepreneurs [and] wealthy clients. We are a wealth manager.”
Lehmann went on to highlight the bank’s plans to cultivate growth in Latin America, Asia-Pacific and Middle East markets. Indeed, under the new strategy, Asia, and China and Hong Kong in particular, is expected to see job growth, while other regions will suffer from the aforementioned job cuts.
Enough equity returned by Credit Suisse?
Even if all points of the Credit Suisse overhaul strategy are executed flawlessly, the targeted return on tangible equity (ROTE) – a measure of a company’s financial strength in relation to tangible assets – is expected to be approximately equal to 6% by 2025.
If Credit Suisse does achieve this, it is expected to be below every other European bank in 2025. For example, KPMG reported that in 2021, following the Covid-19 pandemic, European banks on average had a ROTE of 6.7%, and North American banks had 12.2%.
While the strategy has outlined a clear way forward for those banking with Credit Suisse, its prospects, even in a best case scenario, seem unconvincing.