The decision to raise new capital makes sense. Sticking to the current strategy is not the case.
The crisis-hit bank announced on Thursday that it would issue mandatory convertible bonds that are expected to bring in 1.7 billion Swiss francs, which is around 1.85 billion Equivalent to US dollars. Management stressed it was a proactive move to end speculation about capital levels. The issue will dilute equity by about 8% but is likely required to reassure wealth management clients that the bank is solid.
He also firmly believes that Credit Suisse’s overall strategy is solid. Such a confirmation is surprising, since the bank has been exposed to every major financial scandal in recent years.
In the first quarter, Mr Gottstein pointed to outperformance in almost all business areas and raised the investment bank’s sales growth of 80% compared to the previous year and their increased market share. It ignores, however, that growing investment banking revenues are usually associated with additional risks that may not materialize until much later, as recent problems have painfully made clear. Gaining market share in such a competitive business is difficult and often requires additional measures, e.g. B. undercutting competitors or working with problematic customers.
Given the bad luck – Luckin Coffee, Wirecard, Greensill, Archegos – the bank has to do more than just change a few directors and optimize its risk processes. The oversized loss from the Archegos collapse is particularly worrying as the position was not for a wealth management client, not particularly lucrative, and not unauthorized trading, suggesting that internal risk processes have been followed. While Credit Suisse wasn’t the only bank involved, it had a much greater commitment and potential losses.
The company’s current strategy is to run a full-service asset manager alongside an adventurous investment banking business. Mr Gottstein is reducing his world class brokerage services, which focused on Archegos’ engagement, by only working with key clients who do business with other parts of the bank. However, this will likely only bring the investment bank’s risk-weighted assets back to year-end levels. And asset management, which Greensill’s troubles focused on, is still seen as core for now.
Credit Suisse should consider deeper cuts to its already sub-scaled investment bank. Slimming further to only offer the services needed by its wealth management clients as a higher rated rival in Crosstown
has done, would reduce sales, but also lower risk and free up capital to invest in less volatile businesses, be it in Asia or Switzerland.
External and internal reviews by Credit Suisse will propose reforms, and
Lloyds Banking Group
will have ideas when he begins his tenure as CEO next month. Mr Gottstien may be trying to avoid pre-empting their recommendations.
Nonetheless, his unreserved support for a strategic course that has repeatedly misled Credit Suisse should worry investors. A car accident could be due to bad luck, but four in a row indicate serious problems with the vehicle or the driver.
Published in the print edition of April 23, 2021 as « Credit Suisse needs new tactics after the latest problems ».
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