Credit Suisse’s Most Important Pledge
The Swiss bank’s investors expect new targets from CEO Tidjane Thiam when he addresses shareholders this week. More importantly, it is also his «show me the money» moment. finews.asia explains why.
Investors are parsing three basic scenarios ahead of Tidjane Thiam’s third investor day in London on Friday. The first is that the Credit Suisse boss will confirm 2018 targets laid out when he came into the job over two years ago, and illustrate the bank’s progress toward them.
The more likely is that he will confirm Credit Suisse’s general strategic direction, but have to walk back certain targets, as he already had to one year ago. The prime suspect is the bank’s Swiss unit under Thomas Gottstein: it will almost certainly not reach a 2.3 billion Swiss franc pretax profit by next year.
The third option is the most exciting, and the most far-fetched: Thiam could present new financial targets as well as outline Credit Suisse’s strategy beyond 2018.
Cost Cuts as Quick Fix
A former McKinsey star, Thiam conceded earlier this month that Credit Suisse is «broadly following the same strategy, going after the same opportunities,» as larger rival UBS. The admission begs the question what Credit Suisse can do differently, better, distinctively – not just follow UBS.
A look at post-2018 Credit Suisse? Another big major cost-cutting program may be on the cards: the bank still isn’t lean and efficient enough after cutting its overhead to 17 billion francs. Big banks slash spending – this is the ubiquitous answer from the banking industry to economic and structural challenges.
When he walked back some profit targets last year, Thiam also hiked his target for spending cuts, which Credit Suisse is set to hit imminently. Cost cuts would be grist for the mill of RBR Capital Advisors, a Zurich-based hedge fund which is agitating for big changes at the bank.
A Smaller UBS?
With a paltry 0.2 percent stake set against heavyweight shareholders including a major U.S. fund house and Qatar, RBR head Rudolf Bohli has little chance of persevering with a split-up. Another billion-franc cost-cutting program would likely give Credit Suisse shares a fillip and allow Bohli to notch a quick win.
A strategy reversal such as the break-up Bohli is calling for could attract new, major investors. The «Financial Times» reported that Saudi Arabia is intrigued and may invest, perhaps even displacing archenemy Qatar, which is feeling the squeeze economically.
Credit Suisse bankers insist that the bank will use the investor day to present a battery of numbers underpinning the final third of Thiam’s strategy. This will inevitably raise comparisons to larger rival UBS, which embarked on a similar, and ultimately successful, strategy more than five years ago – something Thiam himself did earlier this month.
Scrips vs Cash Push
If Thiam sees Credit Suisse as «broadly» pursuing the same strategy as UBS, he is glibly ignoring the bank’s patchy payout record. Credit Suisse is a late convert shareholder rewards; to be sure, the bank has usually paid out something, but deftly avoided cash payouts with something called scrip dividends. Why? Scrips protect cash piles and capital.
UBS pledged an at least 50 percent payout ratio in 2012, which it hit in 2014. Last year, Switzerland’s largest bank paid a whopping 70 percent of profits to shareholders. How does Credit Suisse’s ratio stack up? First of all, Credit Suisse hasn’t been profitable for the past two years, so the ratio itself has been negative.
A deeper look at Credit Suisse explains why chairman Urs Rohner and Thiam get endless stick from shareholders for earnings millions, while UBS’ Axel Weber and Sergio Ermotti are largely shielded from anger – despite earning far more.
Into One Pocket, Out Another
If it had paid out cash only, Credit Suisse’s payout ratio would have been over 50 percent in 2012, 2013 and 2014. But it isn’t cash: the bank has swayed investors to take share-based awards – scrips.
It is impossible to calculate how competitive Credit Suisse’s payout practices were before it suddenly became shareholder-friendly seven months: the scrips and cash combination muddy the waters.
This has angered shareholders because Credit Suisse shares haven’t gained substantially in value but also because it dilutes shares. Into one pocket and out the other, shareholders argue.
«Show Me the Money!»
In April, under massive pressure from big shareholders over executive pay, Credit Suisse said it would stop using the scrip payouts, and maintain a payout policy «competitive with that of our peers.»
Thiam and Rohner have pledged to hike payout ratios over time, as Credit Suisse recovers from the previous two years losses. With bonus season looming, the investor event is the duo’s «show me the money!» moment: they can appease shareholders by backing up their springtime promises with the prospect of cold, hard, cash.
