Credit Suisse Profit Isn't Enough to Distract from a Spy Scandal

Credit Suisse attempted to put its embarrassing spying scandal behind it on Wednesday, reporting third-quarter earnings that doubled on the strong showing in global markets and on the sale of a key business trading unit.

The bank’s embattled chief executive, Tidjane Thiam, told reporters during a briefing he saw no signs that clients had lost faith in his leadership. Nor, he added, had he seen any indication they were pulling their money out. That’s despite the bank’s admission to sustaining “grave reputational damage” in the aftermath of a wild dispute between the bank and a former star banker that unraveled in spectacularly public fashion last month.

The rest of the quarter went more smoothly. Net income surged to 881 million Swiss francs ($887 million) thanks to a 327 million Swiss francs windfall profit from the sale of InvestLab, a trading platform. Thiam said group assets under management had reached a record level at the end of September, defying a larger trend in the European banking industry where a bruising business climate is weighing heavily on top- and bottom-line performance.

“Maybe it’s hard to believe, but sometimes things that are hard to believe are true,” the CEO explained.

In a sign of how troubled the European banking sector is, Deutsche bank on Wednesday posted an 832 million euro loss. Meanwhile, HSBC, Europe’s largest bank, on Monday reported an earnings miss, sending shares sharply lower.

Trouble ahead

Results at Credit Suisse were marred by its Investment Banking and Capital Markets (IB&CM) division, which swung to a quarterly loss due to continued weakness in mergers and acquisitions and fewer completed IPOs. And, its wealth management business, a key strategic imperative, missed expectations.

“We missed on a number of transactions, but we still feel very good about our businesses,” said finance chief David Mathers, before adding he was starting to see a recovery in transactions in its key industrial segment.

The bank also gave a downbeat outlook for the final quarter of 2019. “We also expect headwinds from the ongoing challenging geopolitical environment, most notably the U.S.-China trade dispute and Brexit, to persist,” the bank said in a statement. “This is likely to lead to more cautious capital expenditures and investment decisions, specifically looking forward to 2020 and 2021.”

The markets found the results uninspiring. Shares in the Swiss banking giant were down more than 2 percent in early afternoon trade.

Keefe, Bruyette & Woods analyst Thomas Hallett called Credit Suisse’s underlying profits “unimpressive” when matched against quarterly consensus estimates, reaffirming his underperform rating. “Forward expectations still need to be reduced in our view,” he wrote, disappointed by chronic problems at IB&CM.

Spy games dominate press briefing

Management ended up devoting most of the quarterly results briefing responding to questions from the media about the botched surveillance of former divisional boss Iqbal Khan in July.

This triggered a chain of events that led to the resignation of the bank’s operations chief, Pierre-Olivier Bouée, plus an apparent suicide that police are investigating.

The incident has lingered over the upper management as well, who’ve insisted Bouée acted on his own. “How is it possible I didn’t know? I am telling you I didn’t know,” Thiam told reporters.

The scandal broke just as the bank hoped to move on after three painful years of deleveraging.

Chairman Urs Rohner himself came under attack for personally signing off on a non-compete clause of just three months—unusually short in the world of investment banking—for Khan, the one-time star banker who made the jump this month to crosstown rival UBS to run its wealth management business.

“The board has got complete confidence in Mr. Rohner as the Chairman of this company, including his personal handling of the arrangements surrounding Mr. Khan’s departure from the company on the 1st of July,” said John Tiner, head of the board’s audit committee earlier this month at a hastily called press conference after news broke that the bank had hired investigators to tail Khan.

Rohner is looking to ride off into the sunset come 2021, leaving behind a slimmer, healthier and more stable bank.

It was Rohner who began to chart in 2015 a course away from CS’s reliance on a volatile trading business in which stringent solvency requirements gobble up an increasing amount of regulatory capital.

That same year he brought in Thiam, an outsider from the more conservative world of insurance, to run the bank. As CEO, Thiam succeeded the American, Brady Dougan. Together, Rohner and Thiam recapitalized the bank and hived off toxic residential mortgage backed securities in a bad bank that at its outset was Credit Suisse’s largest division by risk-weighted assets.

Pauline Lambert, a London-based debt analyst with Scope Ratings argued the market looks to have fully digested the spying scandal, and have begun to move on. But that wasn’t the case in the early days of the incident.

The volume of trade in Credit Suisse-related credit default swaps, a form of insurance bondholders take out against a company failing to meet in full its financial obligations, initially showed some worrying spikes in the aftermath, she said.

Yet this barometer of market sentiment was far from panic levels and has since receded after the chief operating officer took responsibility and resigned early this month while an independent investigation cleared Thiam.

“Investor attention has moved on since the findings of the independent investigation were published in early October. Continuity in management and strategy will be viewed positively while scrutiny on the performance of the investment bank will remain relevant going forward,” she said.