A long-term comparison shows that the new management of Credit Suisse has made bold decisions. It wants to separate itself more clearly from American-style investment banking than its big competitor on Zurich’s Bahnhofstrasse. Hopefully it works.
Credit Suisse management made bold decisions – it was high time.
For Rainer E. Gut, only the really big ones were good enough. Thanks to his early experiences and connections on Wall Street, he managed to buy into one of the big American investment houses in the late 1970s. When their investment bankers got their house into trouble by taking too many risks, Gut took advantage of this to take over a majority stake in First Boston with Swiss capital in 1990. Credit Suisse First Boston CSFB was born. Various acquisitions in investment banking followed and were intended to ensure that the Unternehmerbank am Paradeplatz (and the salaries of its top people) could play in the top league worldwide.
From an economic point of view, this corresponded to clever calculation for a long time: the capital generated relatively securely in asset management and the excess liquidity could be made available to the investment bank more cheaply than it could have been obtained on the capital market. In return, the agile specialists for corporate financing and mergers and the smart dealers promised the conservative bankers on Paradeplatz higher returns.
What UBS tackled more than ten years ago. . .
But since the financial crisis, this model no longer works so easily. The risks that the financial institutions in investment banking had on their books turned out to be much greater than expected in some cases. The regulators reacted sharply, making the business and the cross-subsidization significantly less attractive. It became apparent that a very large and stable universal bank is needed to be able to take on the growing risks in investment banking without threatening the rest of the business.
UBS felt this the hardest. From 2007 to 2009, their investment banking posted losses totaling CHF 57 billion. The bank had to be supported by the state by outsourcing “toxic” investments to a “bad bank”.
In 2012, under the leadership of ex-Bundesbank President Axel Weber, who had experience in regulatory matters, and former investment banker Sergio Ermotti, the bank decided to undergo a more fundamental restructuring. Another net 178 billion in assets were moved to the bad bank for resolution, reducing the balance sheet and risk-weighted assets. Since then, UBS has been generating relatively stable positive income even in its reduced investment banking.
The situation at CS was completely different. Under the operational management of Wall Street banker Brady Dougan, the institute seemed to come through the crisis relatively unscathed. His losses in investment banking from 2007 to 2009 totaled just 3.5 billion francs. Dougan went for expansion and even increased the risk in 2010. The bet only worked to a very limited extent; returns proved riskier and more volatile than the competition.
Above all, however, an overly uncontrolled risk culture took hold. It has proved devastating to CS in recent scandals. While UBS managed to regain investor confidence, CS literally crashed. At the end of the third quarter of 2022, UBS was worth the equivalent of CHF 50.1 billion on the stock exchange, while CS was only CHF 10.4 billion – and that with risk-weighted investments that are now comparably large.
. . . CS is now trying to catch up more consistently
It became increasingly clear that CS must now act if it does not want to completely lose the trust of investors and thereby jeopardize its existence. With the announcement of a new strategy, the leadership around the new CEO Ulrich Körner and Chairman of the Board of Directors Axel Lehmann – both previously worked at UBS – dared to do so last Thursday. If appearances aren’t entirely deceptive, they are determined to pull off a full-scale exit from US investment banking and refocus the bank entirely on global wealth management.
The apparently attractive Securitized Products division, which is active in the securitization and corporate financing business, is to be spun off and sold. From the previous investment banking, only the market division, which carries out and structures currency and securities transactions for customers, is to remain in the new CS. The business with corporate transactions, on the other hand, is to be spun off into CS First Boston, which will be resurrected as an independent investment house. Management and third parties should participate.
As a result of these changes, the remaining investment banking assets will have to be reduced to around CHF 43 billion by 2025, risk-weighted. That would be about 40 percent less than today and almost exactly half of the assets that UBS currently holds in its investment banking. In fact, UBS, which is currently around 30 percent larger in terms of total assets and traditionally less anchored in investment banking, has slightly increased its capital allocation and investment banking risks measured in Swiss francs since 2017.
The new CS leadership, on the other hand, wants and must now implement a reduction quickly. Comparisons always suffer from the inadequacy of different definitions and boundaries. But the restructuring at CS also appears more radical than at UBS because it provides for a more consistent shift in the proportion of capital and risk-weighted investments that wealth management can claim for itself. In just three years, CS Investment Banking will only receive a fifth; at UBS it is currently a third.
If the new management of CS, which until recently was still heavily influenced by Wall Street, remains consistent in implementing its strategy, it could even sell CS First Boston entirely as soon as it is so independent and attractive again that an opportunity arises. Rainer E. Gut’s ambitions would then be exposed late and painfully as a mistake that is now threatening the existence of the major Swiss bank.
There are other reasons for this. Most of the investment banking services are transaction oriented. The entrepreneur’s fortune is best served when his company receives the most competitive offer at any given time; regardless of whether CS is in the name. Asset management, on the other hand, is designed for long-term relationships that are as constant as possible. Behind the two approaches are very different cultures, the clash of which has repeatedly led to difficult trench warfare in the major Swiss banks.
Not an easy project
The reason given time and again in the market for the very hesitant separation from problematic parts of investment banking is that this can only be achieved at great expense. For CS, the conditions for this have hardly improved recently. In order to regain the confidence of investors, it must succeed in selling the securitized products division to Apollo and Pimco within a reasonable period of time and at a reasonable price. It is important to outsource CS First Boston and keep the good employees on board in such a way that the institute actually remains attractive and can be sold.
Operationally, a “bad bank” is now also to be created at CS, which will recycle systems that are no longer used. UBS’s experience has shown that this can be expensive. There, the reduction in assets by CHF 180 billion (a good five times more than CS now wants to reduce) went hand in hand with posted losses of CHF 8.2 billion.
The grace of early failure has given UBS a competitive edge. But now the question of how the share price (and thus the performance-related compensation) can be further driven up with growth in the USA is driving their leadership again. The CS, on the other hand, is now tackling a conversion that comes late, but seems more radical and consistent. It is to be hoped that he will succeed. Then the entrepreneur-bankers from Paradeplatz could suddenly become role models again.