Credit Suisse's restructuring: 10 things you need to know
Something needed to change. In the first nine months of this year, costs at Credit Suisse's investment bank accounted for 143% of revenues. In the third quarter, they rose to 161%.
"We have not been disciplined enough about our capital and our costs," lamented Credit Suisse's new-new CEO Ulrich Körner today. "The investment bank has not created value for some time," Körner added. "Going forward the investment bank will be radically different."
Chairman Axel Lehmann shares the vision. As Credit Suisse doubles down on its Swiss heritage, Lehmann deployed a Swiss metaphor: "We will rebuild Credit Suisse with a firm foundation rock solid like our Swiss mountains," he declared.
Credit Suisse "is on a journey." What does this mean in practice?
1. There will be 9,000 job cuts
We've written about this already. You can read about it here. Not all the cuts will be in the investment bank. Some people will be spun out and encouraged to thrive elsewhere. Some will be subject to "organizational simplification [and] workforce management." 2,700 people are being eliminated before Christmas.
2. Something unpleasant will happen to the Credit Suisse markets business
In the future, Credit Suisse's markets business will be far smaller than it is today. In 2025, only 10-11% of risk weighted assets will go to the markets business. In 2019, the last year for which Credit Suisse broke out capital allocated to its markets business specifically, nearly 20% of RWAs went to markets.
Does this mean that Credit Suisse's markets professionals are unwanted? Not at all. Credit Suisse says it still loves its markets professionals, it's just that it only wants them in relation to the work they can do for its wealth management business and Swiss bank. The markets business is "core" and "critical" to wealth management clients. In fact, Credit Suisse even wants to provide markets services to other wealth managers.
Unfortunately, though, as we've noted before, there are some areas of the markets business (eg. credit trading) that are of less interest to wealth management clients than others.
So, who's going? The chart below shows the plan. Broadly, it's looking bad for anyone working in emerging markets sales and trading and financing, which are now being wound down along with the rump of the prime services business. There are also some ominous statements around the equities business, which CS says will "simplify and streamline platforms and footprint" and produce "focused research."
3. Credit Suisse's investment bankers will have a hypothetically happy future in their own business: CS First Boston
As per the chart above, Credit Suisse's capital markets, M&A advisory and financing bankers are getting their own firm, CS First Boston. The new entity will be run by Michael Klein, a former Citi banker who's been hanging out on the Credit Suisse board and running his own one or two man boutique.
Credit Suisse is pretty excited about CS First Boston. “Imagine a firm purely focused on capital markets and advisory,” said Körner today, before inviting his audience to imagine a litany of other exciting things about the new firm. It will be a boutique, but not a boutique - bigger than the average boutique, with an ability to serve international clients. Maybe a bit like Evercore, or PJT then.
With revenues in what will be the new firm down 82% in the first nine months of this year, it might be presumed that CS First Boston will be off to a shaky start. However, CS First Boston has already attracted $500m in outside investment and will be shopping for more.
Körner suggested that Credit Suisse's bankers should be pretty excited about the new structure because of the implications for their pay. It will be run in a partnership structure "like the old days," said Körner. It might have a "different compensation system" as a result, and this will be good for "talent." An analyst asked if this means CS First Boston employees will have a lot of stock in the firm. Körner indicated that they will indeed.
4. CS First Boston will be based in New York
This looks a little scary for any Credit Suisse bankers in London, but Klein is in New York and presumably didn't want to move. New York is also where the "biggest fee pool" is, says Körner. However, in the first nine months of 2022, Credit Suise ranked outside the top 10 in US M&A. In EMEA, it ranked 10th.
5. Credit Suisse is seemingly cutting its ECM and DCM bankers in Europe
One analyst at a rival bank questioned this morning whether most of the corporate finance franchise is being closed in Europe. "EMEA and Europe will be very much focused on advisory," said Körner. Asia will be more about advisory and corporate finance. The implication is that Credit Suisse's ECM and DCM bankers will be cut in Europe.
6. Credit Suisse markets business will "support" First Boston
Even though CS First Boston will be a standalone business, it will still lean on Credit Suisse's existing markets business. The implication is that markets staff will help execute ECM and DCM deals.
7. Things might get painful for people in the securitized products group
As feared, the securitized products group has been purchased by Apollo Global Investors and staff will be shunted across to Apollo. "Apollo will look to quickly weed out any fat in the organization but will be positive for the producers," says one insider.
8. Even after all these changes, Credit Suisse's return on tangible equity will be poor
Once all its changes have been made, Credit Suisse is targeting a return on tangible equity (RoTE) of ~6% by 2025. As an analyst pointed out this morning, this is worse than any other European bank.
9. The cuts are being masterminded by Francesca McDonagh
Francesca McDonagh has been through all the business lines and worked out what needs to be cut, said Körner. In the future, every business area needs to cover its cost of capital. "Market desks that do not gneeratie sufficient returns throughout the cycle are planned to be exited,” he added.
10. Leveraged finance will still be part of CS First Boston
Credit Suisse still likes its leveraged finance business. This is despite the fact that there were $120m of mark-to-market losses on leveraged finance deals in the third quarter. External capital is being sought for the business.
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