Andreas Ita has high praise for Credit Suisse's new strategy. The former UBS executive and current managing director of consulting firm Orbit36 tells finews.com where bank management around Ulrich Koerner has more work to do.
Mr. Ita, Credit Suisse presented a whole bouquet of measures yesterday to stabilize the bank. Was the management under Ulrich Koerner courageous enough in doing so?
We think so. With the announced reduction of the investment bank by 40 percent, the management of Credit Suisse has made clear its commitment to focus in the future on wealth management and the Swiss banking business and to reduce the Markets division, i.e. the new investment bank, pure supplier function.
What was missing - what could bank management have done better?
Credit Suisse management probably didn't have that many strategic options that could be implemented given the current situation. The strategy announced is therefore entirely in line with our expectations. In our view, information on the expected long-term profitability of the new investment bank as well as the bank as a whole was somewhat lacking.
«CDS spreads as well as AT1 bond prices have already recovered from their extreme levels»
So far, it remains somewhat nebulous how the bank creates sustainable value for shareholders once the strategic transformation is complete. For example, the targets for return on regulatory capital to 2025 are below the cost of capital. At Credit Suisse, these are more in the range of 10 percent than the targeted 6 percent return on regulatory capital.
Credit Suisse shares plunged immediately after the announcement. Despite all this, has management not succeeded in creating new confidence among investors?
The decline in the share price is largely due to the dilutive effect of the announced capital increase. We consider the measures taken to be suitable for creating new confidence. This view is also supported by the CDS spreads and the prices of AT1 bonds, which have already recovered significantly from their extreme values at the beginning of the month.
A nasty surprise was the billion-dollar write-down on deferred tax assets, which Credit Suisse realized on the balance sheet in the third quarter, apparently a result of the restructuring. Where do you see further pitfalls in the bank's restructuring?
This is about the write-off of deferred tax assets, which are a direct consequence of the discontinuation of certain business areas. In restructuring - at this early stage - not all details are known. Decisions on a more granular level, such as the restructuring of individual legal entities, can often only be made later. In this context, surprises due to tax or capital effects can never be completely ruled out.
So there are more imponderables?
It should also be borne in mind the transaction regarding the sale of the structured products group (SPG) is not yet in the bag and that many detailed issues still need to be resolved regarding the creation of the independent legal entity CS First Boston.
Why did Credit Suisse choose the option of reviving the CS First Boston investment bank rather than simply selling the businesses directly?
The sale of individual business units in a group is a demanding and complex matter. With the chosen option, Credit Suisse is buying the time it needs to transfer the relevant businesses to an independent business unit as a first step. This gives it the flexibility to give employees a stake in the unit, to raise funds from third-party investors, and perhaps later to conduct an IPO, which Koerner hinted at as a possibility. The variation is elegant because it saves Credit Suisse the restructuring costs of layoffs, lets employees keep their jobs, and still let Credit Suisse shareholders participate in any recovery in market conditions.
Koerner & Co communicated a lot about the new structure and savings, but remained vague about the return prospects of the new construct, as you say. Is that justified?
The bank must manage to at least cover its cost of capital after 2025 and create value for shareholders. This is the only way to avoid a sustained valuation discount to book value. To be fair, however, it must also be said that higher returns often only materialize a few quarters after a successful restructuring.
«The option of a new SKA (Schweizerische Kreditanstalt, or SKA, was the predecessor of Credit Suisse) is more in line with the romantic ideas of many Swiss»
This was also the case at UBS at the time. We suspect that the top management of Credit Suisse deliberately provided rather conservative information so as not to have to surprise the market later with a missed target. In this sense, the bank seems to have learned its lessons from the past.
The future of the bank depends first and foremost on wealth management. But the division has not been able to shine recently. Are the hopes placed in this draught horse exaggerated?
Wealthy customers have several banking relationships. They typically react by switching when they have doubts about a bank's creditworthiness. When confidence returns, they will tend to repatriate funds to ensure sufficient diversification of their balances.
It is striking that, of all the strategic options, Credit Suisse has been very cautious about its Swiss business. What is the argument against the vision of a new SKA run as an independent company?
This option corresponds more to the romantic ideas of many Swiss than to an economically sensible strategy. Economies of scale play a major role in the banking business and also in asset management.
Andreas Ita is the founder and managing partner of Orbit36, a company that advises banks and insurance companies on strategic planning and risk and capital management. The Swiss banker started his career in equity derivatives trading and worked for UBS for a total of 22 years. Most recently, he was head of Group Economic Performance and Capital Optimization at the Swiss bank until mid-2019. He holds a Ph.D. in Banking and Finance from the University of Zurich.
