Credit Suisse closes the 2021 financial year with a write-down of CHF 1.6 billion and a pre-tax loss of over CHF 500 million. After the departure of the controversial short-term president, the bank leadership around Thomas Gottstein would like to play free. But it won’t be easy.
Sees no quick solutions for CS: CEO Thomas Gottstein.
Credit Suisse (CS) ended the horror year 2021 with a horror quarter. In the last quarter, net income of 4.6 billion Swiss francs resulted in a pre-tax loss of 1.6 billion Swiss francs. For the year as a whole, the big bank reported a pre-tax loss of CHF 552 million on net income of CHF 22.7 billion.
The bottom line is a net loss attributable to shareholders of 1.6 billion francs (last year a profit of 2.7 billion francs). As in the previous year, CS also proposes paying a minimal dividend of just CHF 0.10 per share. Up until the 2016 financial year, 0.70 francs and more were the norm. “2021 was a very challenging year for Credit Suisse,” summarizes CEO Thomas Gottstein.
The CS got off to a brilliant start. Like all banks, it benefited from a special boom caused by the pandemic at the beginning of 2021: central banks worldwide had flooded the markets with liquidity, governments had offered fiscal support – the stock markets were booming, customers were investing and trading diligently. A wonderful environment, especially for the wealth management business.
But the CS messed it up. When the hedge fund Archegos collapsed, it lost a total of 4.8 billion francs. She entered into a disastrous business relationship with the supply chain financier Greensill, which continues to burden the big bank. In a nasty affair about loans for state-owned companies in Mozambique, CS was fined 475 million Swiss francs.
In the fourth quarter, it also had to write off 1.6 billion Swiss francs of goodwill on the 2000 purchase of US investment firm Donaldson, Lufkin & Jenrette. Other significant legal disputes, which essentially stem from investment banking, cost a further CHF 436 million. Added to this was the turmoil surrounding the Chairman of the Board of Directors, António Horta-Osório, who had to resign from office after only a few months after several quarantine breaches.
Disappointing earnings
While the series of hits in 2021 might be shocking, there is something else to worry about: CS experienced a slowdown in business in the final quarter of 2021. Some of the customers are withdrawing from the markets and repaying their Lombard loans; partly voluntarily, partly under pressure from the bank. The return of inflation and the prospect of interest rate hikes – after the Bank of England and the US Federal Reserve, the European Central Bank could also be under pressure this year, according to CS – created uncertainty that will certainly persist into the second half of the year.
Financial analysts describe CS’s net earnings in the final quarter of 2021 as disappointing. The Asia Pacific unit reported lower client risk appetite and a 20 percent decline in net revenues to $661 million.
After the Archegos debacle, CS took risk out of the investment bank on its own initiative. The result: Net income shrank by almost a third to $1,604 million. While asset management stagnated at CHF 387 million, the Swiss unit of the big bank was able to increase by 5.6 percent to CHF 1,313 million.
Global asset management performed particularly poorly, reporting a 19 percent drop to CHF 695 million, with “normalized client activity” reflected in lower transaction-based income.
He left behind a new strategy – and had to give up the presidency after only eight months: António Horta-Osório.
The latter will particularly hurt the bank and its shareholders. Because in wealth management, CS wants to look for growth and salvation in the future. This is the greatest legacy of António Horta-Osório. At the beginning of November 2021, he presented a new strategy together with Thomas Gottstein: The most important decision was to shift the emphasis in the group away from risky investment banking and towards high-growth asset management. A step that the competitor UBS has successfully demonstrated to CS.
In search of momentum
The bank management around the new presidents Axel Lehmann and Thomas Gottstein is facing a difficult year, not only because the market environment is tending to deteriorate. She has to find her momentum again, as the CEO said several times in front of the media and analysts, and he immediately added: “There will be no quick solution.”
Gottstein admitted that the bank had been preoccupied with its own problems, especially in December, and had not focused enough on customers. In 2022, CS will have to solve several of these problems quickly and in parallel in order to get back on track.
The renewed group management – seven out of twelve members have only joined in the last few months – has to come together as a team. Credit Suisse needs to get the new matrix organization it unveiled in November up and running without losing key employees. She needs to manage the risks and risk culture in the bank without driving out the entrepreneurial spirit she likes to invoke. She must pay attention to costs while making investments. This also means that CS intends to employ around 500 customer advisors between 2022 and 2024.
The bank has reduced the bonus pot for 2021 by almost a third to CHF 2 billion; considering the losses that the shareholders have to bear. In 2022, the pot should increase again by CHF 1 billion so that CS can pay competitive wages.
The stock market took a skeptical view of the annual report: in a market that was trending sideways, the CS share ended trading down 6.8 percent and still costs 8.62 francs. The market capitalization of almost 23 billion Swiss francs has revived rumors of a takeover of Credit Suisse.
Greensill report remains classified
Even if CS tried to draw a line under the horror year 2021 financially: it has not yet been able to free itself from all legacy issues. This is particularly true of the Greensill Capital debacle. The collapse of the supply chain financier, with whose products CS filled four investment vehicles worth a total of 10 billion dollars for its wealthy customers, has not yet been overcome. Customers are still waiting for the return of funds today. The asset management of CS, but also the bank management did not make a good impression when checking the Greensill products.
An investigation report on Greensill that the bank commissioned has long since been completed, as CS has now also announced. It was shown to the Board of Directors and the Financial Market Authority (Finma), but is still being kept under wraps. Because of the “complex legal context of the matter”, the board of directors does not want to make it public. In other words, a publication could jeopardize the bank’s position in what will probably be a year-long struggle for the good CHF 2 billion that is still missing due to the Greensill collapse. CS made five insurance claims totaling $1.2 billion.