The board of directors of Credit Suisse is in the process of discussing the future of investment banking. A new calculation shows why the bank can no longer avoid drastic cuts in its former flagship business.
If the latest media reports are to be believed, the opening shots in the next trench war have been fired at the controversial investment banking unit of Credit Suisse. On the board of directors of the bank, opinions differ on what to do with the loss-making division. Defenders with their investment banking careers, such as Michael Klein and Blythe Masters, are opposed on the board to forces that want to cut the business back hard, it is said.
Credit Suisse officially intends to comment on any adjustments to its corporate strategy at the end of October. But already in July, new CEO Ulrich Koerner outlined the transformation of the investment bank into a capital-efficient, advisory-oriented banking business as well as the search for an investor for the business with securitized loans (Securitized Products Group, SPG).
Investment Bank Guardians Gone
The clock is ticking for investment banking at Credit Suisse, especially since the changing of the guard at the top of the bank. The dealmakers under former bosses Brady Dougan and Thomas Gottstein, both investment bankers by background, could count on sympathy at the top. But with CEO Koerner and his two newly appointed deputies CFO Dixit Joshi and COO Francesca McDonagh, top management is now made up of experienced restructuring experts.
The new triumvirate is unlikely to harbor any emotional attachment to the investment banking sector and will be more concerned about the figures.
Sobering Facts
Calculations made recently by Deutsche Bank project Credit Suisse's investment bank will not return to profit in its current construct until 2024. A sobering fact is that the unit accounts for one-third of the group's capital, but has generated the worst return of all operating divisions in the group over the past three and a half years.
Getting through the projected lean years until 2024 without major cuts in the business is unlikely to be an option for cost-cutting Koerner.
Mind the Gap
That becomes more relevant as a financing gap appears to be opening up at the major bank. The Deutsche Bank analysts calculate that Credit Suisse has a shortfall of up 4 billion francs for the upcoming restructurings, the growth plans in asset management, and securing the capital base.
Rumors of a new capital increase startled shareholders in May and seem to be the thorniest way for the bank's management to plug the hole of the missing billions. A sale of the securitization unit SPG, on the other hand, could be a big plug for that very large hole, the report concludes. A brutal cut in investment banking could spare Koerner from having to make a hollow gesture to the bank's owners.
Cutting Own Flesh
To be sure, such a sale is not without considerable risks, endangering know-how and risking the loss of customers. One is reminded of the debacle when Credit Suisse decided to sell its American private banking business to Wells Fargo in 2015. The bank's management will have to choose between the bird in the hand or the two in the bush. A sale would give up relatively safe millions to obtain billions. The SPG unit under consideration has generated an estimated $20 billion for the banking group over the past ten years.
That's no mean feat and a reminder that 33 percent of revenues at Credit Suisse last quarter came from the investment bank, and 34 percent from the new core wealth management business. It's also a reminder of why former Credit Suisse managers and board members never really wanted to touch the investment bank, and why a cut in the division will always cut into the flesh of the group.
