Credit Suisse CEO Tidjane Thiam is cutting back the Swiss company's investment banking division. But now the business is booming.
Last week, J.P. Morgan and Citigroup set the tone for the third quarter 2016 – reporting above-average results in investment banking. Trading with various financial products and merger-and-acquisition advice did particularly well.
Goldman Sachs and Morgan Stanley will follow suit this week and analysts expect very good results as well. The developments might well cause some headaches among Credit Suisse (CS) top managers.
What About the Timing?
CS CEO Tidjane Thiam a while ago decided to cut back the bank’s investment banking business, because risks and costs had proved excessive in the past. Instead, the bank was to focus on private banking. This reallocation of resources may have come at an inappropriate time, it now seems.
CS will report third-quarter results on November 3. In the second quarter, the bank had seen first signs of a turnaround, a development that likely continued in the three months through September, not least in investment banking.
Volatility on the markets was very high in the past months, making trading particularly lucrative for banks. And CS was surprisingly successful in the mergers-and-acquisition business. Thus, Switzerland’s No. 2 may finally have turned the corner toward a financially sound future.
A True Test for CS Strategy
Analysts know however that investment banking remains a volatile business. In good times, profits tend to be extremely high, in bad times the banks need a lot of financial muscle to finance acquisitions. Profit from private banking frequently had to make up for sudden deficits at the investment banking division.
The reverse is probably true now. Investment banking will cover for private banking, which has seen sluggish business recently. Rich investors have kept their powder dry due to economic and political risks. Even Asia, the growth market of the past years, has seen better times, proof of which was to be seen in the first-half results of the bigger banks.
The third quarter will thus come to be seen as a true test for the strategy of Credit Suisse. The bank both has to show that Thiam’s decision to focus on wealth management was correct and still reap the benefit of good times in investment banking. Analysts would likely react with a lowering of their share price targets should CS have failed to take advantage of its investment banking expertise.
Irony Not Lost
Furthermore it will be interesting to see how the strategy in Asia has panned out, where CS is offering investment-banking and private-banking services as a package to the seriously wealthy clients. From a Swiss perspective, analysts are also waiting to hear more about the milestones achieved in taking the Swiss business public by 2017.
Signs are that Thiam will be able to claim that his strategic changes have helped CS turn the tide. It will be ironic if the unit that he aimed to cut back more than any other has helped him the most achieving this.
