Credit Suisse equities business under the microscope after revenue crash

By Stefania Spezzati and Elisa Martinuzzi

LONDON (Reuters) – At the grandiose Fontainebleau Miami Beach hotel, Credit Suisse hosted its top clients in October amid growing doubts it was still in the securities trading game after a series of high-profile blunders.

From BlackRock (NYSE:) to CBOE Global Markets, investors and trading firms were treated to fireside chats with guests such as former U.S. President George W. Bush, networking by the lavish hotel’s beachside pools, and fine dining. But it wasn’t long before the mood turned sour, according to an executive at the three-day conference.

As the sun rose in Florida on day two, back in London, the Swiss bank’s managers were unveiling their latest restructuring plans – and the global securities trading business being showcased in Miami was in the crosshairs.

Scarred by a $5.5 billion hit from the unravelling of U.S. investment firm Archegos in 2021, a retreat from the hedge fund business and unprecedented client outflows, Credit Suisse said it needed billions in capital and planned to spin off the bulk of its investment bank, sending its shares into a tailspin.

At the Fontainebleau hotel, Credit Suisse bankers were puzzled by the announcements, and concerned about their jobs being on the line, said the executive, who declined to be named.

In subsequent weeks, some of those bankers were let go while others, such as Doug Crofton, then head of global equities for the United States, left to join rivals.

And a spectacular downfall for what was once a key revenue generator for Switzerland’s second-biggest bank ensued, as some clients and investors pulled back, said two people with knowledge of the matter who declined to be named.

Since then, Credit Suisse has struggled to convince investors its overhaul will put the bank on firmer footing – and how it will reorganise securities trading is a big piece of the puzzle.

“No business is viable when its revenues vanish and expenses continue,” said Peter Hahn, emeritus professor of banking and finance at The London Institute of Banking & Finance. “Cost-cutting and efficiency can improve the profitability of a leading or even marginal business, but not a failing business.”

In response to questions from Reuters for this article, a spokesperson for Credit Suisse in London said: “We never comment on rumours or speculation.”

OTHER OPTIONS?

In a sign of investor angst, Harris Associates, one of Credit Suisse’s biggest shareholders in recent years, said this week it had sold its stake. Its chief investment officer, David Herro, told the Financial Times that he lost patience with the bank’s strategy to stem persistent losses and a client exodus.

Under the overhaul unveiled by Chief Executive Ulrich Koerner in October, trading would in future serve the needs of the bank’s wealth clients – its main focus – and also work with CS First Boston (CSFB), its newly created investment bank.

Trading, which accounted for 26% of the bank’s revenue in recent years, would make up about 15% of sales in its new, streamlined form at the revamped Credit Suisse by 2025, it said.

Credit Suisse latest results showed, however, that revenue from buying and selling stocks and bonds slumped by 88% in the last three months of 2022 from a year earlier.

The decline in equities trading was particularly brutal. In the three months through December, revenue plummeted 95% to 18 million Swiss francs ($19 million).

Koerner told analysts in February that some of the losses at the investment bank were related to “intentional de-risking”, without elaborating.

The bank has set up a non-core unit where it will park some unwanted activities to wind down or sell, but it remains unclear which assets or portfolios will be moved.

(Graphic: Credit Suisse goes off piste, https://www.reuters.com/graphics/CREDITSUISSEGP-OUTLOOK/klvygdbrgvg/chart.png)

But keeping the equities business in its streamlined form has not been the only option the bank has considered, according to one of the people with knowledge of the matter and a third source, who declined to be named.

As Credit Suisse worked on its turnaround plan last autumn, executives informally considered selling some parts of the equity business though the option was not formally reviewed by the board, the two people said.

The option wasn’t pursued partly because managers thought it would be difficult to find buyers, they said.

The complexity of extricating the technology platforms that allow equity trading and then integrating them at another bank was another factor in Credit Suisse’s decision to hold off, the people said.

Credit Suisse declined to comment.

Now, the fourth-quarter slump will make it harder to convince investors the bank should stick with the business, said Hahn at The London Institute of Banking & Finance.

By comparison, revenue from equities trading at five major Wall Street banks only fell 10% on average in the same period.

‘A ROCK AND A HARD PLACE’

Even after Credit Suisse stopped financing hedge funds following the Archegos implosion in March 2021, the equities business remained a key part of its investment bank revenue.

Credit Suisse profits in equities by making a cut on large volumes of shares it trades on behalf of clients, and by structuring derivatives, or complex financial products, which are often sold to more sophisticated wealthy customers.

The plunge in fourth-quarter revenue included a sharp decline in derivatives, according to the two of the people with knowledge of the matter, as customers shunned Credit Suisse after its credit rating deteriorated.

In November, S&P Global (NYSE:) Ratings downgraded the bank’s long-term rating to one step above junk, following revisions on some ratings from other credit agencies.

The downgrades damaged the bank’s ability to lure clients who instead looked for what they considered to be safer and more attractive alternatives, three equities traders who structure derivatives at rival lenders said.

The equities market is dominated by big U.S. banks such as JPMorgan Chase (NYSE:), Morgan Stanley (NYSE:) and Goldman Sachs (NYSE:) with the means to invest consistently in the business and new technology.One option Credit Suisse is considering is to move its equities research to CSFB, Reuters reported.

CSFB aims to become a “super boutique” with as much as $3.5 billion in revenue by advising on deals including initial public offerings. CSFB would benefit from working with Credit Suisse’s equities bankers to find buyers for shares.

Slimming down the equities business would draw a further line under Credit Suisse’s investment bank ambitions.

“There are key question marks around the importance of the equities business given it requires huge scale to make it economically viable,” said Thomas Hallett, an analyst at Keefe, Bruyette & Woods.  

“The group is stuck between a rock and a hard place.”

($1 = 0.9409 Swiss francs)