Once is chance, twice is coincidence, three times is a pattern.
Credit Suisse issued its third profit warning of the year on Wednesday, saying its investment bank will make another loss in the current quarter and drag the bank into the red as capital markets activity has been depressed by Russia's invasion of Ukraine and recent central bank monetary tightening.
That indicates a crisis in its investment bank is deepening. After a series of scandals, Credit Suisse is trying to reduce risk by slashing capital allocated to the investment bank and exiting prime services, but that saw a raft of senior bankers quit last year. Fees have crashed, and while other banks have also seen a drop in income, it is not of the scale seen at Credit Suisse.
"CS's revenues keep trending down, costs are described as not flexible this year and limited flexibility next year, and the succession of quarters with a net loss is destroying capital," said Jefferies analyst Flora Bocahut in a research note. "CS shares will be challenged until revenue momentum turns, which is going to take several quarters at best."
A Swiss media report that US custody bank State Street was planning a takeover gave Credit Suisse shares a surprise boost hours after the profit warning, but the rise was short-lived and analysts downplayed the likelihood of a deal. State Street later said it was "not pursuing an acquisition of, or any other business combination with, Credit Suisse".
Credit Suisse CEO Thomas Gottstein also steered analysts away when asked about a possible deal at a financial conference on Thursday. “My father once gave me advice that for really stupid questions you rather don’t comment, so I will listen to my father’s advice on this one,” he said.
Credit Suisse shares fell to SFr6.32 on Friday morning, down 4.3% on the week and just above their recent low of SFr6.09, their lowest level since at least 1989. They are down 29% this year and have lost 45% since the start of 2021.
Transition year
Gottstein said Credit Suisse was in the middle of a “transition year” and the restructuring wasn't being helped by difficult markets and its less diverse model than many peers.
Credit Suisse has long prided itself on an entrepreneurial culture – and has made money by taking risks that others wouldn't. But that model is difficult to sustain when there is a sharper focus on risk and compliance. It has also often served clients in riskier areas, such as leveraged finance, subprime credit trading, securitisation, structured credit and asset finance.
But that has left it more exposed to areas that are currently doing badly. It is more geared to credit markets and capital markets issuance, and less exposed to FX trading, rates and commodities, which are faring better. Leveraged finance and SPAC deal activity have slumped, both areas where the bank is strong. In contrast, it has completed 95% of its exit from prime broking, and that is one of this year's best performing areas.
Gottstein said while those factors were hurting, it vindicated the plans to put more focus on wealth management, simplify its structure and improve risk controls, and make the investment bank a more asset-light franchise that can deliver more stable and higher returns over the cycle.
"Q2 is tough for us, and May was particularly tough," he said. "But the current market environment, if anything, makes our commitment to the execution of our strategy even more important and we want to accelerate some of the moves we announced."
The investment bank made a loss in 2021 and again in the first quarter, and is set for another one in Q2 amid low levels of capital markets issuance and the widening in credit spreads. The bank said advisory revenues had been "resilient" and trading revenues had benefited from higher market volatility, albeit with an uneven performance.
Some rivals, including JP Morgan and Bank of America, have also warned that investment banking fees will be down sharply this quarter, although offset by higher trading revenues thanks to the volatile markets.
Credit Suisse's fees from advisory, underwriting and syndicated loans in the first five months of this year were US$947m, down 56% from a year earlier and the biggest drop among the major banks, according to Refinitiv data. That saw it slip to seventh in the global rankings from sixth a year ago.
Bankers said Credit Suisse appeared to be losing share after the departure of some big name bankers who feared a long period of retrenchment and crimped bonuses.
“In the investment bank last year we clearly had an attrition problem, but we addressed that, and we continue to hire," Gottstein said on Thursday. He said 55 managing directors had been hired in banking this year. "Clearly it’s a competitive world and we’re in competition for talent, but it's absolutely a core priority for us," he said.
Banana skin bank
Insiders say the strategy is set and a further overhaul of the investment bank is not planned or needed.
But it needs to stop the rot after a long run of bad news: it took SFr5.5bn of losses from US hedge fund manager Archegos Capital Management last year; clients were exposed to losses from Greensill funds; senior executives were embroiled in a spying scandal; and its chairman quit in January after breaching Covid lockdown rules.
And there's more: a SFr1.7bn goodwill writedown in February on its 2000 purchase of US investment bank Donaldson, Lufkin & Jenrette; provisions for other legacy litigation issues; a US$475m fine from US and UK authorities in connection with financings it arranged for Mozambique from 2013 to 2016; and a possible US$500m hit from a Bermuda court to its life insurance subsidiary there.
That means overhauling risk management is an even greater priority than the strategic shift, but that comes with costs. A detailed report on failings related to Archegos showed that in 2019 Credit Suisse had 94 managing directors in the risk function, but by the end of March 2021, some 37 of them had left, and mostly been replaced with internal promotions of junior staff.
