Credit Suisse Group AG is experiencing serious financial problems after stepping on several rakes at once. He must be able to handle it, but he cannot afford to put the wrong foot. The Swiss bank’s global wealth business is its most valuable asset and there is a danger that its reputation – especially among customers in Asia and the Middle East – will be contaminated by the lender’s regrettable risk management, revealed by its exposure to the month’s explosions past of Greensill Capital and Archegos.
A new leadership is on the way with Antonio Horta-Osorio taking over as president soon. Just as importantly, the experienced former Bank of America executive, Christian Meissner, is preparing to take control of the struggling investment bank. CEO Thomas Gottstein has survived so far because he is relatively new to the job, but it was the worst start to his reign possible. In a conference call on Tuesday, the CEO pointed to Horta-Osorio’s arrival as a chance to reevaluate the bank’s strategy, according to Bloomberg News.
With a series of company-wide layoffs following the Archegos and Greensill accidents, nearly a whole cadre of senior bankers has been removed. The immediate need is for strong leadership to secure the ship and maintain the best performances during a dark time for the company. A pre-tax loss of 900 million Swiss francs ($ 960 million) in the first quarter, a two-third cut in dividends and a suspension of share repurchases are bad enough. The real risk to staff retention is that the bonus pool will have to be reduced significantly.
To strengthen employee and shareholder confidence, Credit Suisse must allay its problems and make a statement of intent about what it will look like in the future. Although having to write off $ 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 that it is fundamentally solid.
However, losses from your Greensill-supported supply chain finance funds or your Archegos exposures may not be fully quantified, including any potential regulatory and legal exposure. Then the pain can get worse. However, by the end of 2021 these episodes may be largely in the past, as long as Credit Suisse takes advantage of this moment to adapt your risk culture.
He may want to think carefully about his commitment to special purpose procurement companies (SPACs). Credit Suisse was one of the most aggressive subscribers to this sparkling segment equity markets.
Going beyond the Greensill disaster will be expensive, but relatively simple. Supply chain financing is not vital for the bank. The difficult decision will be how Credit Suisse balances its duty of care between shareholders and investors in the exposed fund. Any decision not to make these investors whole it would have repercussions on its wealth management and private equity businesses. Reputations take decades to build and moments to lose, and the most stable path for the Swiss bank’s growth is to add money from private and institutional clients.
The strategic calculation in the aftermath of Archegos is more thorny. First-rate brokerage services for hedge funds and family offices are a key core business for the investment bank Credit Suisse – it cannot operate practically without access to the most active and (usually) profitable clients.
What should concern top management most is how it was left with Archegos’ biggest losses when faster rivals long ago left the building. Putting aside counterparty risk assessment failures, the bank did not react quickly enough and did not have adequate guarantees. Only after a new fire sale on Monday, Credit Suisse was able to calculate the number of its losses, a week after most of its rivals.
This looks like another excellent year for investment banks in general, so Credit Suisse looks doubly stupid. His fellow Swiss champion UBS Group AG is performing well, highlighting the chasm that has grown with his closest rival. Rumors of a merger of the two are rarely far away. Private capital can also attack at a time of weakness. The new management must start to act proactively, now.
(This column was updated with a reference to Tuesday’s conference call.)
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