Credit Suisse: It Can Only Get Better

A poor year, with a catastrophic fourth quarter: Credit Suisse has not started well into the tenure of CEO Tidjane Thiam. The targets set for 2018 look challenging and rays of hope remain sparse.

 1. A Poor Year

Taken together, Credit Suisse clearly had a weak 2015 – even without the bank's countless write-downs. Investors seem to agree and are selling the shares in a frenzy.

At 23.8 billion Swiss francs, total revenue was 2.5 billion lower than a year earlier. The two main reasons were firstly a completely cocked up fourth quarter. The bank complained extensively about the challenging market conditions in its press release. And secondly, the investment bank. The traditionally more volatile unit swung into negative territory in the quarter. The Swiss Universal Bank unit and Credit Suisse's private bank were also weaker. Pay spending rose despite a drop in performance.

2. Capital Increase

CEO Tidjane Thiam was proud of the bank's successful cap hike, which lifted Credit Suisse's capital buffer to 12.2 percent. Fourth-quarter results show that the cap hike was necessary in order to write down goodwill and to clean up the investment bank's past. Credit Suisse's key capital ratio has declined to 11.4 percent.

3. Too Much Creative Destruction?

Thiam has made substantial changes to Credit Suisse since taking over in July: successful cap hike, splitting up the «one-bank» into new divisions and regions, and launching the Swiss Universal Bank, for example. The restless Ivory Coast native also took a long-overdue write-down of goodwill in the fourth quarter.

Thiam's creative destruction is a risky bet though. With a loss of 2.95 billion francs last year, Credit Suisse opened a yawning gap between today's performance and the previously disclosed target to double profit to 7 billion francs by 2018.

4. Swiss Universal Bank: A Rare Ray of Hope

The Swiss business, which Thiam has rebranded and is preparing for an initial public offering by the end of 2017, is a rare ray of hope for CS. Pretax profit increased 4 percent to 1.6 billion francs in 2015, a more than respectable result, bearing in mind that it even managed to deliver a pretax profit of 367 million in the lousy fourth quarter – as the only unit within CS.

Of course, this is only half of what the business delivered a year earlier and very much the result of Barend Fruithof's good work with corporate and institutional clients. Fruithof of course left for Julius Baer last year.

5. Investment Bankers: Thiam's Lost Battle for Lower Pay

Thiam not long ago angrily complained about the refusal of investment bankers to accept pay cuts during hard times. Today it has become evident: Thiam lost the battle with his bankers. Wages at both investment banking units increased.

CS claims the increases to reflect market conditions. The problem with this: the performance of investment bankers was poor, with double-digit earnings falls in both divisions.

6. Digs at Dougan

Thiam, who has been at the helm of Credit Suisse for just over six months now, aimed a few thinly-veiled barbs at his predecessor, Brady Dougan.

Credit Suisse’s investment bank advisory arm «has suffered from under investment in the past,» is getting beefed up to smooth out swings in earnings from the unit, Thiam said.

The CEO is also tweaking fixed income, an area which investment banker Dougan was famously hesitant to trim substantially. Thiam said the bank has «material positions» in fixed income where liquidity dried up in the fourth quarter, or where spreads widened significantly and require markdowns on inventory.

Credit Suisse finally wrote down goodwill from its 18-billion-franc acquisition of U.S. investment bank Donaldson, Lufkin & Jenrette, which it bought at the top of the market. In subsequent years, the bank made no secret of the fact that it had overpaid, but it took 16 years – and three CEOs – to finally write down the goodwill.

No more scrips: under Dougan, CS let shareholders choose between cash and scrip dividends, which are shares instead of outright cash and benefit the bank’s capital ratios. Thiam said Credit Suisse would abandon scrip dividends and return to cash payouts by next year.

 7. Net New Money

Credit Suisse had a surprisingly healthy flow of net new money. They increased to 51 billion francs from 37.5 billion a year earlier: a sign of trust from clients. The Swiss unit took the lion's share, with 14 billion and the Asia Pacific region with 18 billion.

 8. APAC – Helping CS to Perform

The Asia Pacific region (APAC, along with the Swiss unit) prevented an ever worse performance, contributing with more than a billion francs in pretax for the first time. It also recorded the biggest increase in net new money and signs are that the expansion has only just begun: CS wants to have about 800 client advisers in the region by the end of 2018. It currently employs 590, 70 of which joined last year.

The plans are not without risk though. The origin of some of the money offered to the banks in Asia is sketchy. UBS has started refusing some of the money offered. CS will face similar questions as it bids to rapidly increase assets under management and profits.

 9. Declining Oil Price

Credit Suisse has $9.1 billion in outstanding loans in the oil and gas industry – most of it in North America. That's $3 billion more than its biggest rival, UBS. Even if the bank has taken measures to protect itself against bad debt, the risks from a crash remain. J.P. Morgan, Citigroup and Wells Fargo have put money aside as they prepare from a potential fallout. Standard & Poor's considers half of all loans in the industry under risk.

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