Credit Suisse didn’t implode. As it turns out, the shrill social media cacophony and sundry doomsday bloggers didn’t actually have the inside line on an imminent SIFI failure. Imagine that, right?
On October 3, I castigated mainstream financial media portals for inadvertently legitimizing an unfounded rumor about a purportedly imminent systemic event centered on an alleged liquidity crisis at the bank. Credit Suisse’s restructuring, fraught as it was, wasn’t a Lehman moment, I insisted. People a lot smarter than me called the rumors absurd. “If you really believed this, you’d be limit short everything,” Boaz Weinstein remarked, at the time.
On October 17, The New York Times, which, say what you will, takes a little more care in their reporting than some finance-focused media conglomerates and outlets, deconstructed the social media frenzy at the heart of the rumors. “Reached via private message on Twitter [one netizen] said all he had looked at before sending out his tweet was Credit Suisse’s ‘low stock price and memes on Reddit,'” Maureen Farrell, Emily Flitter and Joe Rennison wrote, of one participant in the melee. “Twitter was the reason I found out about it,” said another. The Times summed up the shenanigans: “A storied institution had become a meme stock.”
As I recounted early this month, the fact that Credit Suisse is struggling was the furthest thing from a secret. The bank is beset, and has been for some time. Mini-crisis after mini-crisis — from Greensill to Archegos — eroded confidence and everyone with even a passing interest has long been acutely aware of the need for a sweeping overhaul. CEO Ulrich Koerner is attempting just that.
On Thursday, Koerner unveiled the long awaited results of a strategic review alongside the bank’s Q3 results, which included a net loss of $4 billion, inclusive of a CHF3.7 billion impairment tied to the revamp.
Thanks to the unceasing efforts of the very same financial media outlets which (unwittingly) perpetuated the dubious liquidity crisis narrative, the details of the restructuring were mostly known ahead of time. On that, at least, the mainstream financial media was mostly on target.
The investment bank is set for a dramatic overhaul, which will resurrect the First Boston brand under the leadership of Michael Klein. Christian Meissner will depart after two years in a role cross-selling IB services to the bank’s wealth management clients. Credit Suisse described the IB restructuring as “radical.” The recreated CS First Boston will be an independent capital markets and advisory bank. Credit Suisse imagines an entity that’s “more global and broader than boutiques, but more focused than bulge bracket players.” Media reports suggest an outside investor has already offered to put $500 million behind the business.
IB posted a pre-tax loss of $640 million in Q3. Revenue fell 58%. In Markets, revenue was down 90% YoY, or 78% if you exclude mark-to-market losses in leveraged finance. Credit Suisse was keen to note that the 78% drop was consistent with a lower fees Street-wide. That’s true, but I wouldn’t describe the 32% drop in FICC revenue and a 55% decline in Equities trading as good outcomes, irrespective of the admittedly challenging environment and tough comp.
As expected, the Securitized Products Group will be sold. Or, more accurately, “a significant portion” will be “transferred” to “affiliates” of Apollo and PIMCO, which will acquire the majority of the assets and manage the rest. That deal should close early next year.
The bank on Thursday also said it’s creating a “Non-Core Unit” tasked with quickly divesting non-strategic, low-return businesses and markets. I’ve previously described a prospective sale of the securitized products business as tantamount to trading profitability for capital. Credit Suisse said that between exposure reduction in securitized products, other planned divestments and reductions in RWA and leverage from the new non-core unit, “significant amounts of capital” will be released, helping to smooth the “strategic transformation.”
The Saudis are stepping in to help. Specifically, the Saudi National Bank (so, basically the wealth fund) will participate in a CHF4 billion capital raise. Investors including the Saudis could end up with a 9.9% stake courtesy of commitments to invest as much as CHF1.5 billion in a share sale and rights issue.
Ahead of the unveil, various reports suggested Credit Suisse wasn’t excited about a capital raise considering where the shares were trading — i.e., at a record low. And yet, money was apparently leaving wealth management, in part due to the churning rumor mill.
All told, restructuring charges look to be north of $6.5 billion. It’s hard to say what, precisely, investors were upset about Thursday, but presumably the scope of the revamp and the assumed dilution from the sale of new shares wasn’t priced in. At one juncture, the stock was down 16% (figure above), before trimming some losses.
The bank wants to reduce its cost base by 15%, or CHF2.5 billion, in part by a headcount reduction of 2,700 full-time-equivalent employees, or 5% of the workforce, and large cuts to consultancy and contractor spend. By 2025, headcount will be 9,000 lower, the bank said. “Meaningful dividends” will be paid from 2025 onwards. Until then, payouts will be “nominal.”
Ultimately, this is a complex endeavor (to put it mildly), and assessing success or failure won’t be possible for quite some time. Koerner called it “a historic moment for Credit Suisse.” The bank’s “new integrated model… is designed to allow us to deliver a unique and compelling proposition for clients and colleagues while targeting organic growth and capital generation for shareholders,” he added.
There’s a lot of execution risk in the IB spinoff, the implied dilution from the capital raise isn’t great (even if it was necessary) and the SPG unit was valuable. You can draw your own conclusions, but whatever you do, don’t get your restructuring hot takes from social media.
“During the first two weeks of October 2022, following negative press and social media coverage based on incorrect rumors, Credit Suisse experienced significantly higher withdrawals of cash deposits as well as non-renewal of maturing time deposits,” the bank remarked on Thursday, noting that those outflows “have since stabilized to much lower levels but have not yet reversed.”