Credit Suisse bets on rich Europeans trading

Bloomberg

Credit Suisse Group AG is seeing a pickup in its private banking business in Europe as clients seek counsel on how to protect fortunes from shock election outcomes.
“Clients need advice,” on how to manage political uncertainty, Iqbal Khan, head of international wealth management, said in an interview at the bank’s headquarters in Zurich. “I would expect Europe to rebound in profitability.”
Last year, clients spooked by events including the UK vote to leave the European Union refrained from putting their cash to work in investments that earn fees for the bank. The trend was pronounced in Europe, the only region where revenue from managing money for the wealthy declined even as client assets grew, Khan said.
The reluctance of the very rich to deploy their money complicated the bank’s restructuring plan, which relies on wealth management to drive profit. One year into the overhaul, Credit Suisse was forced to lower two of three profit targets in December, including for Khan’s new unit.
Khan is now targeting a pretax profit of 1.8 billion francs ($1.8 billion) for 2018, down from a previous goal of 2.1 billion francs. Whether he can achieve that depends a lot on generating better returns from Europe, where the Brexit vote has stoked anti-European Union sentiment ahead of elections in France, the Netherlands, Germany and possibly Italy.

Risk Shy
Khan expects 3 percent to 4 percent growth this year from net new assets in western Europe, the largest source of client money in his unit, with 107 billion francs at the end of the third quarter. That’s about a third of his entire wealth pool, which includes Latin America, the Middle East, Africa and emerging markets in eastern Europe. Some private banking operations are also handled out of Credit Suisse’s Asia-Pacific and Swiss divisions. “Europe is one of the biggest wealth pools but it’s a different wealth pool from emerging markets,” Khan said. Europe “should have high profitability,” considering that it presents less risk than other parts of the world.
People with more than 50 million francs under management or total wealth exceeding 250 million francs contribute about 45 percent of the assets under management in Europe. Uncertainty is anathema to these super-rich investors, who prefer to give up returns for reduced risk.
Chief Executive Officer Tidjane Thiam told investors last week that the bank is using its skills in investment banking to design complex solutions to help ultra-wealthy clients manage risks. Cost cuts and investments in technology and staff should also bolster profit, Khan said. Expenses were stable at his unit last year after adjusting for litigation and restructuring costs.
“We re-based the whole cost structure in Europe,” Khan said. “We created a higher base in terms of business volume and I would expect that to pay off in 2017.”

Open Pockets
Assets under management jumped 12 percent for the unit last year, with net new money growing 4 percent in western Europe after Khan replaced about 180 relationship managers. Overall the number of advisers fell to 1,140 from 1,180 a year ago, while total headcount at the division rose 6 percent to 10,300.
As part of its strategy for growth in private banking, Credit Suisse is opening its pockets to wealthy clients, offering loans in the hundreds of millions of dollars, which has the advantage of increasing both profit margins and assets under management. That has raised eyebrows among some analysts, who say such aggressive lending could backfire.
“One of the focus areas for growth at Credit Suisse has been the private banking business through loan growth,” James Chappell and Iro Papadopoulou, analysts at Berenberg, wrote in a note to clients after Credit Suisse published results last week. “As with any bank business, the risk comes later, and for Credit Suisse we do wonder whether it is going down the risk curve to deliver growth.”
Lending drove profitability in the international wealth management unit last year. Loans to clients increased 12 percent to 45 billion francs, with net interest income — the difference in income earned from loans and that paid on deposits — rising 30 percent. That lifted the gross margin — the amount of revenue relative to assets under management — to 112 basis points from 107 basis points in 2015. Revenue from recurring commissions and fees declined as did transaction- and performance-based income.
Building ‘Speedboats’
After losing about a third of their value last year, the shares have gained 6.7 percent this year. They were little changed Tuesday at 15.59 francs at 11:59 a.m. in Zurich.
Khan, 41, a former partner at Ernst & Young, was Credit Suisse’s chief financial officer of private banking and wealth management before Thiam reorganized the bank in October 2015 creating the international unit. One of Khan’s first steps was to streamline the business, stripping out layers of management in an effort he likened to building “speedboats.” He said he personally had 300 meetings with clients last year.
While Khan says he’s confident his unit will generate the extra 700 million francs it needs to reach its profit target, others are less sure. Andreas Venditti, an analyst at Vontobel in Zurich, estimated that international wealth management will post an adjusted pretax profit of 1.6 billion francs in two years, 200 million francs short of the goal. The Swiss universal bank and Asia Pacific divisions will probably also miss their goals, he said in a note published after the bank reported last week.
“If the uncertainty in the political arena unfolds, that can have some impact,” Khan said. “But I still feel that Europe is going to be a driver in 2017.”