Credit Suisse: Thiam tied up in knots

When Credit Suisse chief executive Tidjane Thiam announced his big strategic vision for the bank in October 2015, soon after joining from insurer Prudential, it always looked like a dog’s dinner.

At a time when most global banks were looking for simplification and collaboration, former management consultant Thiam took the opposite route.

Asia – wealth management and investment banking – was carved into a separately run and capitalized business; all Swiss operations were combined into a legally separate Swiss universal bank; the rump of global wealth management and global wholesale banking were left to their own different devices, one as a core target for growth, the other cut back and at best tolerated.

Just how it all works in practice continues to baffle analysts, competitors and even a lot of Credit Suisse’s own senior bankers and wealth managers.

The one certainty, it seemed, was that the Swiss universal bank would be partially floated in 2017. 

This was not explicitly designed to raise capital for the group – rather the strategic logic was that it would unlock the value of a business whose returns on equity far outstripped the group, and give the Swiss business some autonomy of leadership and capital to take advantage of further opportunities in its home market, where rival UBS generates profits of around SFr3 billion a year, compared with Credit Suisse’s SFr1.7 billion, despite having similar business offerings.

But this year, the rumblings from its Paradeplatz headquarters in Zurich suggest that the IPO might not happen. Despite Thiam and colleagues saying it was never cast in stone, and would always be a board decision, that’s quite a U-turn.

Why the apparent change of heart? A few reasons are bandied around.

Credit Suisse’s capital position is actually looking better than before, in part because a settlement with the US Department of Justice over mortgage-bond mis-selling came in at the lower end of the range, albeit at more than $5 billion.

Credit Suisse’s share price has also been in recovery mode, making a group-level rights issue for any remaining capital shortfall – estimated to be between $2 billion and $4 billion – both more realistic and more palatable to investors who stumped up SFr6 billion in December 2015.

Such arguments, however, rather miss the point that an IPO of the domestic bank was not meant to be a capital-raising exercise for the group in the first place.

More relevant, perhaps, is the fact that big investors in Credit Suisse group – around 70% of its stock is held by non-Swiss investors – are kicking up a fuss about losing 25% of the earnings from what is seen as the bank’s best business and most stable source of earnings generation. Credit Suisse insiders have confirmed as much to Euromoney.

That’s a valid argument, albeit one that surely the same investors held when Thiam announced his original plans 18 months ago. Which begs the question: did Thiam, the former consultant, forget to consult his big investors before making such a key strategic decision?

People close to the chief executive office say Thiam has cleverly given himself optionality by not committing to the IPO plans, but to Euromoney, it seems he has boxed himself into a corner.

If he goes ahead with the IPO, he annoys some of his biggest shareholders. If he cancels it, he’ll risk the ire of a lot more people: the bankers who have worked hard to get the Swiss operations ready for a float; and the local staff and customers who have lived through the irritation and embarrassment of a proud Swiss bank almost brought to its knees by international misadventures, and were looking forward to putting that chapter into the history books through a symbolic separation.

A final decision on the float is expected to be made by the board before the end of the second quarter. Euromoney’s hunch is that, having now cast doubt on it, it would be one U-turn too many to go ahead with the IPO.

Is it time to reappraise Thiam’s whole strategy? In Asia – the big, joined-up hope – the investment bank that accounts for around two-thirds of regional revenues delivered a meagre profit of just SFr7 million in the fourth quarter, although wealth management in the region posted a 65% rise in profits for the whole of 2016.

The bright spot was international wealth management (IWM), which beat analysts’ expectations by 45% over the same period, and delivered a very healthy return on equity of 24% for the full year.

IWM at least has a plausible strategy to be “the bank for entrepreneurs”, although it needs close collaboration with still-at-arm’s-length investment banking to thrive. That leads some people internally to speculate that wealth and investment banking will eventually be brought together, Asia-style, at a multi-regional or global level.

There’s a big obstacle, beyond convincing private bankers they should be joined at the hip with the investment bank they resent having to previously subsidize: while Credit Suisse still has a big investment banking and markets operation in the US, it has no remaining wealth management business there.

One final sour note for Thiam: in the week that doubts about the IPO gathered steam in late March, Credit Suisse’s share price lost about 10% of its value. If that trend continues, then a group-level capital raise could fall off the table, and plans for a Swiss listing put back on.

One thing is for sure, though: these days, at Credit Suisse, nothing is certain.