Credit Suisse, after Archegos, faces tough choices in investment banking

When Credit Suisse CS 2.39%

Group AG announced a $ 4.7 billion hit from the collapse of Archegos Capital Management, there was a silver lining: the rest of its investment bank did so well in the quarter, the overall loss before taxes would be only $ 1 billion.

The situation exposes the bank’s dilemma. Its risk-taking investment bank has been its profit driver, offsetting its larger and slower growing wealth management businesses. But now it should be downsized for safety, with chief executive Thomas Gottstein saying its structure and strategic relevance will be assessed.

The prospect of increased restructuring costs and lost revenue in the unit has prompted some analysts to downgrade the stock, which has already been down 25% since late February following the one-two hit of the collapse of another client, Greensill Capital, then Archegos.

Eoin Mullany, analyst at Berenberg Bank, said risk taking in investment banking and across Credit Suisse would likely be reduced and that “would inevitably lead to lower growth and lower income.” .

Even before the recent incidents, Credit Suisse was one of a number of European banks whose longstanding problems made them difficult to invest.

Former chief executive Tidjane Thiam cut risks and costs, and set a new cultural tone before being ousted following a spy scandal last year. But the bank continued to generate high fees following lawsuits and regulatory settlements related to problematic cases. Many investors are wary of its riskier business mix than that of its biggest rival UBS Group AG


“There is little visibility on what needs to be fixed and at what cost. The group can get by with its current capital base, but it has little room “for more unexpected losses,” said Filippo Alloatti, senior credit analyst at Federated Hermes.

He said he expects an in-depth review of the business from António Horta-Osório, who begins as chairman of Credit Suisse on May 1. Mr. Horta-Osório oversaw an overhaul of Lloyds Banking Group PLC as Managing Director.

Last year, a year of strong market growth, Credit Suisse generated 40% of its turnover through investment banking. This was an increase from 35% in 2019 and almost half before Mr Thiam’s restructuring from 2015. UBS, on the other hand, got 28% of its investment bank’s 2020 revenue. .

At Credit Suisse, much of the growth in 2020 came from the costs of trading stocks and bonds, including underwriting blank check companies known as SPACs.

In March, ahead of Archegos’ woes, Credit Suisse said that the investment bank’s income rose 50% from 2020 levels so far this year. He said the bank’s profit before tax as a whole was the highest in a decade.

Wealth management income, meanwhile, was lower, down 8% in 2020; at UBS, it increased by 4%. The increase in the number of transactions made by wealthy clients in volatile markets has not offset lower recurring fees and a compression in net interest income due to negative interest rates, Credit Suisse said. Its turnover also reflects the depreciation of a participation in a hedge fund.

UBS generally has a higher proportion of “shock-absorbing earnings,” according to Michael Rohr, analyst at Moody’s Investors Service. For example, UBS’s wealth management business is more diversified globally, including in the United States, from which Credit Suisse has pulled out, according to a Moody’s analysis of the two banks in December.

UBS’s investment bank is smaller and less complex, weighted primarily for stock trading, and easier to manage and monitor risk than Credit Suisse, said Rohr. At the end of March, the rating agency switched to a negative outlook on Credit Suisse to reflect unexpected events at Greensill and Archegos and the potential strain on capital.

Different company profiles are reflected in the divergence in how investors value banks. UBS stock trades roughly once its book value per share or what the bank is worth on its balance sheet. Credit Suisse is trading at around 0.55 of its book value, the largest difference between the two since 2016.

In the same vein, Credit Suisse has slipped away from other European lenders with large investment banking operations. This is the first time in five years to be lower than Barclays PLC, which is trading at 0.6 times its book value. It stays above Deutsche Bank AG

, 0.4 times.

Archegos and how it shook the markets

Write to Margot Patrick at [email protected]

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