Breakingviews - Credit Suisse takes right leaf out of rival’s book

The logo of Swiss bank Credit Suisse is seen at its headquarters in Zurich, Switzerland June 22, 2020.

LONDON (Reuters Breakingviews) - Credit Suisse has already been through the wringer. Former Chief Executive Tidjane Thiam cut 4.3 billion Swiss francs ($4.7 billion) of costs at the Zurich-based lender between 2015 and 2019. Now, his successor, Thomas Gottstein, will make further annual savings of 400 million francs, merge his investment banking units and may shrink the proportion of capital allocated to that business. His plan, which amounts to mimicking UBS, is likely to narrow a valuation discount to the local rival.

It may seem like an odd time to re-examine the group’s markets and banking businesses. Second-quarter results on Thursday showed that Gottstein’s traders and bankers brought in 33% and 61% more revenue respectively compared with a year earlier. Yet that performance will prove fleeting: markets are quieter and pandemic-hit companies seem to have raised all the cash they need for now.

Credit Suisse’s battered valuation, by contrast, would prove more long-lasting without action by Gottstein. He initially ruled out major structural changes after taking over from Thiam in February, but he has little choice: the bank trades at 57% of tangible book value, compared with UBS’s 82%.

Gottstein inherited outsized investment banking and trading businesses compared with his Swiss rival. Those volatile units, which merit a lower valuation multiple, brought in 43% of group revenue on average over the past three years, compared with 26% at UBS. They consume about two-fifths of Credit Suisse’s risk-weighted assets, UBS analysts reckon, compared with one-third at the bigger Swiss bank.

The new plan offers hope. Merging investment banking and trading, and folding in the Asian trading operations, will boost transparency. It would make sense for Gottstein to focus cost cuts on businesses offering debt, equity and M&A advice: they had a higher cost base last year than in 2015, after stripping out one-offs. Finally, his ambition to allocate two-thirds of capital to wealth management over time means sidelining capital-intensive trading operations.

There’s still scope to improve. Gottstein wants to reinvest his savings, whereas shareholders might prefer to receive them in the form of buybacks or dividends. But it’s a step in the right direction. Credit Suisse would be worth 45% more than its current 23.1 billion franc market capitalisation if the lender were to trade on UBS’s multiple of tangible book value. Imitation looks like the surest route to riches.


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