Scandal-plagued Credit Suisse rolls out rescue plan, and investors are not impressed

A chastened Credit Suisse plans to gut its investment banking division and revamp its risk culture to restore confidence after two scandals rocked the Swiss financial giant this year. 

Taking over at the end of April during the height of its crisis, chairman António Horta-Osório on Thursday unveiled the results of his strategy review, which will refashion the bank so that it’s more in line with crosstown rival UBS, by focusing on stable recurring revenue from wealth management.

Speaking to analysts, the Portuguese national and former CEO of Lloyds Banking Group said the board would be “relentless” in overseeing management’s execution while simultaneously fostering a culture of accountability and responsibility.

“The number and magnitude of past incidents has been unacceptable,” said Horta-Osório, only weeks after a fresh settlement over legacy legal risks from a Mozambique bond deal. “We seek to put risk management at the core of the bank and the center of everything we do.”

Credit Suisse shares were up 0.2% in afternoon trading, largely in line with Europe’s Stoxx 600 index, up 0.4%.

The targeted measures stopped short of sweeping structural changes some had expected amid media speculation that Credit Suisse’s asset management division might be sold or combined with that of a rival. This division fell into disrepute after marketing to investors shares in four funds packed with $10 billion in dodgy debt originated and packaged by now insolvent supply chain financier Greensill Capital.

Moreover, beleaguered chief executive Thomas Gottstein held on to his job, despite the double whammy of possible client lawsuits related to Greensill and the $5.5 billion the bank lost in the implosion of Bill Hwang’s Archegos hedge fund. Cost cuts in risk management and the promotions of responsible executives months before the scandals broke put the judgment of the Credit Suisse veteran in an unflattering light.

“It’s not an ‘evolutionary’ strategy, it’s the right strategy for Credit Suisse,” Horta-Osório said in defense of his less than radical revamp, assuring analysts “there were no sacred cows.”

Fourth-quarter loss

As part of this new strategy, the Zurich lender said it would slash the size of its investment bank’s capital base by a full quarter over its pre-Archegos level by 2022. With the exception of its Asian equities operations, it will entirely exit the prime brokerage business that catered to opaque, speculative clients like the disgraced Hwang in order to focus on advisory services that tie up fewer assets. 

“We plan to be expertise-led, not balance sheet–led,” Gottstein explained during the Thursday presentation. 

As a result, the bank warned it would post a fourth-quarter net loss, owing to a write-down of 1.6 billion Swiss francs ($1.75 billion). The noncash charge fully impairs the last remaining goodwill of the investment bank left on its balance sheet, which stemmed from its acquisition of boutique outfit Donaldson, Lufkin & Jenrette in 2000.

With the savings generated from this consolidation, Credit Suisse aims to beef up its profitable wealth management business over the next three years with an emphasis on mainland China.

The division plans to hire around 500 new managers, an increase of 15% roughly, to serve high and ultrahigh-net-worth individuals banking with Credit Suisse. By deploying 3 billion francs in capital to the business by 2024, it hopes to reap an additional 1.2 billion francs approximately in stable commissions, fees, and interest income annually.

Earlier on Thursday the bank reported a 26% increase in third-quarter pretax profit thanks to a one-off gain of 235 million francs related to the bank’s claims staked with the Archegos insolvency administrator on cash remaining at the collapsed firm.

Credit Suisse finance chief David Mathers told reporters during a press briefing that it was a priority to recover as much as possible from Hwang’s former family office, a type of hedge fund subject to less stringent transparency standards. 

“This is something we intend to pursue with all due vigor over the course of the coming quarters,” he said on Thursday. “Therefore I would very much hope this is not the last recoverability we expect to see with respect to Archegos, although it’s going to be difficult to be confident of the size and timing of the next levels of recovery.” 

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