Credit Suisse’s overhaul strategy does not convince

In response to investor concern over falling stock prices and rising credit default swap rates, Credit Suisse announced an overhaul of its strategy on October 27, 2022. Following this announcement, shares fell a record 19%, the largest single-day drop. checked in.

The strategy – which Credit Suisse has described as “radical”, “decisive” and its “model of success” – will see the Swiss bank seek to bring in 20 banks to underwrite newly issued shares in a bid to raise 4 billion. dollars to finance the new restructuring plan.

Credit Suisse seeks to raise billions with its overhaul

Banks participating in the strategy are believed to include Saudi National Bank (which has committed around $1.5 billion), Goldman Sachs and BNP Paribas. As of November 1, approximately $1.8 billion had been pledged by several investors. As a result, shares of Credit Suisse rose slightly, by 2.2%, showing the start of a recovery for the bank – however, there is still a long way to go.

In October 2022, Credit Suisse’s market value fell below $10 billion, a steep drop from its valuation of $50 billion less than five years ago. Many experts doubt the potential success of the restructuring plan, pointing out that the bank’s poor track record on legal matters (Credit Suisse settled a French tax evasion investigation in October for $238 million) and its rate of High turnover of senior executives dampened investor confidence.

In addition, as part of the restructuring strategy, the bank plans to cut around 9,000 jobs, of which 2,700 are expected to lose their jobs before Christmas (or, as Credit Suisse put it, be subject to “organizational simplification [and] workforce management). Most of the job cuts are expected to be in European corporate finance. The move is expected to reduce the bank’s overall cost base by 15% by 2025.

Investment banking spin-off

Along with the creation of a “bad bank” unit for high-risk assets that Credit Suisse hopes to eliminate, there are also plans to move away from investment banking, including a spin-off for its investment arm. under the CS First Boston brand.

The spin-off – which is headed by Citi veteran Michael Kline – will be based in New York and is positioning itself as a boutique, albeit very large boutique, serving international customers. Credit Suisse CEO Ulrich Körner explained that CS First Boston will operate “just like the good old days” and suggested that employees of the spin-off would own a lot of stock in the company.

Although Credit Suisse’s investment bankers appear to benefit from the split, the strategy aims to drastically reduce its investment banking and trading operations. Credit Suisse Chairman Axel Lehmann stressed that the bank will focus more on wealth management in the future. In an interview with Bloomberg, Lehmann said, “Going forward, Credit Suisse is very much a wealth management-centric, entrepreneur-centric franchise. [and] wealthy customers. We are a wealth manager.

Lehmann then outlined the bank’s plans to cultivate growth in Latin America, Asia-Pacific and the Middle East markets. Indeed, under the new strategy, Asia, and China and Hong Kong in particular, is expected to experience job growth, while other regions will suffer from the aforementioned job cuts.

Sufficient equity returned by Credit Suisse?

Even if all points of Credit Suisse’s overhaul strategy are executed flawlessly, the target return on tangible equity (ROTE) – a measure of a company’s financial strength relative to tangible assets – should be approximately equal. to 6% by 2025.

If Credit Suisse achieves this, it should be lower than all other European banks in 2025. For example, KPMG reported that in 2021, following the Covid-19 pandemic, European banks had an average ROTE of 6.7% and the North American banks the banks had 12.2%.

While the strategy has charted a clear path for those who do business with Credit Suisse, its outlook, even at the best of times, does not look compelling.

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