Credit Suisse’s no good, very bad year gets worse

Credit Suisse chose a bad year to cut risk taking. The Swiss bank’s profit warning was headlined with charges for settling old court cases — but revealed a worrying loss of business in its investment bank within.
It’s another disruptive squall that the bank’s investors didn’t need. It’s barely a week since its reform-driving chairman Antonio Horta-Osorio was ousted after less than a year, for a mix of breaching Covid rules and upsetting other managers with his zeal and his manner.
The big question is whether Credit Suisse has suffered damage to its reputation among clients after its multibillion-dollar mistake from the Archegos family office collapse and customer losses in its Greensill-linked investment funds. Stock trading is a big concern: Credit Suisse turned meek in equities just as its US rivals hit their best revenue in years even after a fourth-quarter dip.
The signs are mixed at best. It was already taken for granted that 2022 would be a year of fixing things at Credit Suisse: investing in risk management and better focusing its resources. The trouble with a profit warning is that it might signal a higher mountain to climb. At worst, the bank could replicate Deutsche Bank AG’s troubles of the past half-decade, when halting and iterative reform along with a slow bleeding away of business led to a long spell of poor profitability because costs fell too slowly versus revenue.
Credit Suisse lost big last year. It will report a loss of about 1.2 billion Swiss francs ($1.3 billion), its worst annual result since 2016. The lion’s share stems from a 1.6 billion Swiss franc impairment of goodwill in the investment bank that it announced in November.
On top of this, the bank said it would take a 500 million Swiss franc fourth-quarter charge for litigation costs, which relates to several historic cases and has nothing to do with the Greensill or Archegos debacles. That was offset slightly by a gain of 225 million Swiss francs from real-estate sales.
Credit Suisse said it would break even in the fourth quarter before counting the goodwill writeoff, which means underlying profits of 275 million Swiss francs. That is far short of analysts’ profit forecast of more than 700 million Swiss francs for the last three months of the year. The shares slipped 2.6%, down 30% since the start of 2021.
Credit Suisse has lost revenue partly because of its decision to take less risk across the investment bank while it reassessed after the losses from the collapse of Archegos. It had greater exposure than peers to the highly leveraged family office and its risk managers mishandled the exposure well.
But Credit Suisse also lost revenue in the fourth quarter from wealthy Asian clients retreating suddenly from markets. They tend to trade a lot and use leverage aggressively, so the pullback hurts both the assets in the wealth business as clients cut borrowing and the firm’s trading revenue.
It may have lost more ground than expected in equities trading after quitting the business of lending to and trading with hedge funds, known as prime brokerage. At the same time, Credit Suisse’s own caution may have hurt its broader fixed-income trading business in what was already a slowing market. The decline in Asia could be a blip, or it could be the beginning of the end of the great Asia wealth story with China cracking down on entrepreneurs and real estate. But it also could be a sign that trading with Credit Suisse has become more expensive for its clients in the region. The other lost revenue is more troubling for investors: Credit Suisse’s fixed-income trading requires a lot of capital to back its specialty in buyout loans and mortgage bonds. Ongoing caution there will mean a permanent step down in revenue.
In equities, it has quit prime brokerage just as rivals like Goldman Sachs and UBS have been reporting record levels of lending to hedge funds and trading activity. But away from prime brokerage, wealth-management clients especially in the US remained a good source of revenue in equities.
The situation will be clearer with Credit Suisse’s detailed fourth-quarter report. But there are indications here that – like Deutsche Bank – a bit of reform and a bit less risk taking are leading to a greater loss of revenue than the plan foresaw. That story doesn’t play out well.
—Bloomberg