Following a number of legacy compliance and risk management failures, most notably the Archegos hedge fund scandal, Credit Suisse has been plagued by sluggish investment banking revenues, losses relating to its business in Russia, and litigation costs.
Analysts had predicted a loss of 567.93 million Swiss francs for the troubled lender’s third-quarter net loss of 4.034 billion francs ($4.09 billion).
The profit for the same quarter last year, which was 434 million Swiss francs, is also significantly lower than this one.
After the Swiss bank reported a quarterly loss that was significantly worse than analyst estimates and announced a significant strategic overhaul, Credit Suisse shares fell by more than 12% on Thursday.
Analysts had predicted a loss of 567.93 million Swiss francs for the troubled lender’s third-quarter net loss of 4.034 billion francs ($4.09 billion). The profit for the same quarter last year, which was 434 million Swiss francs, was also significantly lower than this figure.
According to the bank, the loss was caused by an impairment of 3.655 billion Swiss francs due to the “reassessment of deferred tax assets as a result of the comprehensive strategic review.”
In an effort to address underperformance in its investment bank and in response to a slew of litigation costs that have harmed earnings, the bank revealed a significant reorganization of its operations in response to investor pressure. Ulrich Koerner, the company’s new chief executive, told CNBC on Thursday that it was the beginning of a “transformation into a new Credit Suisse.”
The bank promised to “radically restructure” its investment bank as part of its anticipated strategic shift to significantly reduce its exposure to risk-weighted assets, which are used to calculate a bank’s capital requirements. Additionally, by 2025, it intends to reduce its cost base by 15%, or 2.5 billion Swiss francs.
By the end of 2024, the bank anticipates incurring restructuring costs totaling 2.9 billion Swiss francs.
As part of the transformation plan, Credit Suisse will create a capital release unit to liquidate lower-return, non-strategic businesses and raise 4 billion Swiss francs in capital through the issuance of new shares and rights offerings. Additionally, it will separate its investment bank into an independent company called CS First Boston.
The bank revealed that the Saudi National Bank will contribute 1.5 billion Swiss francs to the planned 4 billion franc capital raise in exchange for a stake of up to 9.9 percent.
Over the course of the restructuring, the bank aims to allocate “almost 80% of capital to Wealth Management, Swiss Bank, Asset Management, and Markets by 2025,” as well as to reduce risk-weighted assets and leverage exposure by 40% each.
Koerner stated in an interview with CNBC that the bank will be “much more stable, will be sustainably profitable, and will be much simpler in how it is set up, and for us, one of the most important things was how did we come to that solution.”We actually started with the needs of the client, designed everything around those needs, and came up with what we propose today.
After Thomas Gottstein resigned in July, Koerner took over as CEO after the bank reported a net loss of 1.593 billion Swiss francs in the second quarter, far below analyst expectations.
He described the strategic revision on Thursday as a “very decisive action program.”
“Number one, the investment bank’s radical reorganization; number two, a substantial cost reduction; thirdly, a further expansion of our capital base, and I believe that together with that, we have all the ingredients necessary to get where we want to go,” he added.
Over the course of the past year, Credit Suisse has been plagued by sluggish investment banking revenues, losses as a result of the withdrawal of its business in Russia, and litigation costs associated with a number of legacy compliance and risk management failures, the Archegos hedge fund scandal being the most notable of these.
The magnitude of the third-quarter loss, according to Vitaline Yeterian, senior vice president for global financial institutions at DBRS Morningstar, was indicative of the strain Credit Suisse had experienced in its core business.
She stated, “Total revenues were below operating costs and well below peers in its core investment banking and wealth management businesses” in both the third quarter and the ninth month of 2022.
“The primary factors were lower trading revenues as a result of a decrease in capital markets revenues and much lower commissions and fees as a result of lower client activity.”In the meantime, total net interest income was also lower year over year.
In addition, the bank experienced a spike in withdrawals earlier this month as a result of what it referred to as “negative press and social media coverage based on incorrect rumors,” which the bank attributed in part to the reputational damage caused by the Archegos and Greensill Capital scandals.
According to Yeterian, reviving the CS First Boston brand might “help to disconnect the IB from the repeated negative press coverage CS has been subjected to.”
She continued, “We clearly see execution risks for the restructuring, especially in light of the challenging economic and geopolitical backdrops.”
At the end of Q3 2022, the CET1 ratio was 12.6%, down 90 bps from June 2022. Although it is not completely secured, the capital increase will undoubtedly provide some room for CS’s plan to be carried out.
