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Credit Suisse impasse makes Deutsche’s look easy

3 minute read

Lloyds Chief Executive Antonio Horta-Osorio speaks at the British Chambers of Commerce annual meeting in central London February 10, 2015. REUTERS/Stefan Wermuth

LONDON, June 17 (Reuters Breakingviews) - Credit Suisse’s (CSGN.S) crisis is not as existential as Deutsche Bank’s (DBKGn.DE) a few years back. On one key question, however, new Chair António Horta-Osório faces a sharper tradeoff. It will require him to choose between strategic logic and current returns.

Like the German lender in the years after 2016, Credit Suisse has had to raise capital and is losing bankers. The latest departure came on Wednesday with reports that M&A boss Greg Weinberger is moving to Morgan Stanley (MS.N). That said, $25 billion Credit Suisse has a highly profitable wealth management franchise to fall back on, and its survival is not in doubt. The cost of insuring the bank’s debt against a default is lower than in mid-2020 despite the collapse of clients Greensill Capital and Archegos Capital Management.

Horta-Osório still has a problem. Deutsche righted itself under Chief Executive Christian Sewing by ditching strategically superfluous units like equities trading and focusing on strengths like making markets in European bonds and foreign exchange. Those businesses also fit well with the needs of its core German corporate clients.

Credit Suisse isn’t so lucky. The biggest part of its investment bank is fixed-income sales and trading, accounting for 40% of the unit’s revenue over the past year. It meshes poorly with the wider group’s core business of managing the fortunes of multimillionaires and billionaires, who have little use for a giant corporate debt-trading operation. Other investment bank specialisms, such as leveraged finance and special-purpose acquisition vehicles, are mainly U.S.-focused businesses, a region where the group’s private bank barely has a presence. Little wonder less than one-fifth of Credit Suisse’s investment bank revenue is directly related to the main wealth division, according to Bank of America.

That’s a headache as Horta-Osório undertakes a strategic review. Ideally, he would double down on wealth management in Europe and Asia by slashing the less relevant U.S. bits of the investment bank. That might earn him a higher valuation multiple: pure play private banks trade at a premium to tangible book value, compared with Credit Suisse’s 40% discount. But it would also mean parting with the investment bank’s most prized teams, hitting returns and making a turnaround more costly.

Horta-Osório doesn’t have to fret about Credit Suisse going bust. But his investment banking conundrum is much more of a head-scratcher.

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- Morgan Stanley has hired senior Credit Suisse investment banker Greg Weinberger, according to June 16 press reports. Weinberger was most recently the Zurich-based lender’s head of mergers and acquisitions.

- Credit Suisse is giving retention bonuses to certain managing directors and other senior staff amid a rising trend of defections, Bloomberg reported on June 9 citing people familiar with the matter.

- The company’s share price fell by 28% between March 1 and June 16, hurting the value of share-based remuneration.

- Other recent departures include Armando Rubio-Alvarez, head of the company’s financial institutions franchise in Europe, the Middle East and Africa, who is moving to Jefferies, Reuters reported.

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