By Stefania Spezzati and Elisa Martinuzzi
LONDON (Reuters) – Credit Suisse hosted its top clients at the grandiose Hotel Fontainebleau Miami Beach in October, despite growing doubts it was still trading securities after a string of high-profile blunders.
From BlackRock to CBOE Global Markets, investors and trading firms have been treated to fireside chats with guests including former US President George W. Bush, networking at the lavish hotel’s beachfront pools and fine dining. But it didn’t take long for the mood to turn sour, according to an executive at the three-day conference.
As the sun rose in Florida on the second day, managers at the Swiss bank unveiled their latest restructuring plans in London – and the global securities trading business presented in Miami was in the crosshairs.
Credit Suisse, scarred by a $5.5 billion loss from the 2021 dissolution of US investment firm Archegos, a hedge fund exit and unprecedented client outflows, said it needs billions in capital and plans to Much of their investment bank spun off its shares into a tailspin.
At the Hotel Fontainebleau, Credit Suisse bankers were puzzled by the announcements and worried their jobs could be at stake, said the manager, who asked not to be named.
In the weeks that followed, some of these bankers were fired, while others, like Doug Crofton, then head of global equities for the United States, left to join rivals.
And a spectacular demise for what was once a key revenue generator for Switzerland’s second-largest bank followed as some customers and investors backed out, said two people with knowledge of the matter who declined to be named.
Since then, Credit Suisse has struggled to convince investors that its overhaul will put the bank on a more solid footing — and how it will reorganize securities trading is a big piece of the puzzle.
“No business is viable if its revenues are gone and expenses continue,” said Peter Hahn, professor emeritus of banking and finance at the London Institute of Banking & Finance. “Cost reduction and efficiency can improve the profitability of a leading or even marginal company, but not a failing company.”
In response to questions from Reuters about the article, a Credit Suisse spokesman in London said, “We never comment on rumors or speculation.”
OTHER OPTIONS?
In a sign of investor anxiety, Harris Associates, one of Credit Suisse’s largest shareholders in recent years, announced this week that it had sold its stake. Its chief investment officer, David Herro, told the Financial Times he had lost patience with the bank’s strategy to stem persistent losses and a run-off.
Under the overhaul unveiled by Chief Executive Ulrich Koerner in October, trading would henceforth serve the needs of the bank’s wealth clients – its primary focus – and also work with CS First Boston (CSFB), its newly formed investment bank.
Trading, which has accounted for 26% of the bank’s revenue in recent years, in its new, lean form would account for about 15% of revenue at the revamped Credit Suisse by 2025, it said.
However, the latest results from Credit Suisse showed that earnings from buying and selling stocks and bonds fell 88% year over year in the last three months of 2022.
The slump in stock trading was particularly brutal. In the three months to December, sales plummeted 95% to 18 million Swiss francs ($19 million).
Koerner told analysts in February that some of the losses at the investment bank were related to “deliberate de-risking,” without elaborating.
The bank has set up a non-core entity where it will park some unwanted activities to wind down or sell, but it remains unclear which assets or portfolios will be moved.
(Graphic: Credit Suisse goes off-piste, https://www.reuters.com/graphics/CREDITSUISSEGP-OUTLOOK/klvygdbrgvg/chart.png)
However, keeping the stock deal in its streamlined form was not the only option the bank considered, according to one of those familiar with the matter and a third source who declined to be named.
As Credit Suisse worked on its turnaround plan last fall, executives were informally considering selling some parts of the equities business, although the option has not been formally considered by the board, the two people said.
The option was not pursued in part because managers thought it would be difficult to find buyers, they said.
The complexity of carving out the technology platforms that enable stock trading and then integrating them with another bank was another factor in Credit Suisse’s decision to hold off, the people said.
Credit Suisse declined to comment.
Now the fourth-quarter slump will make it harder to convince investors that the bank should stay in business, said Hahn of the London Institute of Banking & Finance.
For comparison, stock trading revenue at five major Wall Street banks fell an average of just 10% over the same period.
“A ROCK AND A HARD PLACE”
Even after Credit Suisse stopped funding hedge funds after the Archegos implosion in March 2021, the equity business remained an important part of its investment banking earnings.
Credit Suisse capitalizes on equities by reducing large volumes of stocks it trades on behalf of clients and structuring derivatives or complex financial products, often selling to more sophisticated wealthy clients.
The slump in fourth-quarter sales included a sharp drop in derivatives as clients avoided Credit Suisse after their credit ratings deteriorated, according to the two people familiar with the matter.
In November, S&P Global Ratings downgraded the bank’s long-term rating to one notch above junk after some ratings from other credit agencies were revised.
The downgrades hampered the bank’s ability to attract customers who they felt were instead seeking safer and more attractive alternatives, said three equity traders who structure derivatives at competing lenders.
The stock market is dominated by big US banks like JPMorgan Chase, Morgan Stanley and Goldman Sachs, which have the resources to invest consistently in the business and new technologies. One option Credit Suisse is considering is moving its equity research to CSFB, Reuters reported.
CSFB aspires to become a “super boutique” with sales of up to $3.5 billion by advising on deals, including IPOs. CSFB would benefit from working with Credit Suisse equity bankers to find buyers for shares.
Streamlining the equities business would draw another line under Credit Suisse’s investment banking ambitions.
“There are critical question marks about the importance of the equities business because it requires tremendous scale to be commercially viable,” said Thomas Hallett, an analyst at Keefe, Bruyette & Woods.
“The group is stuck between a rock and a hard place.”
($1 = 0.9409 Swiss Francs)
(Additional reporting by Oliver Hirt, Noele Illien and Sumeet Chatterjee; Editing by David Clarke)
