CS Credit Suisse Group

By John Letzing 

ZURICH-- Credit Suisse AG executive Iqbal Khan was talking to an anxious client earlier this year, while the Swiss banking giant was weathering a difficult transition.

"What are you guys doing--are you guys stable?" the client asked, according to Mr. Khan.

It was the sort of question coming up frequently in relation to Credit Suisse. The lender was in the process of a broad strategic shift under new Chief Executive Tidjane Thiam, amid a series of quarterly losses, publicized infighting and a tumbling share price.

That was taking place against a backdrop across the banking sector of negative interest rates, heightened regulation and a grim investment outlook.

Credit Suisse has since begun to find its footing under Mr. Thiam, a former insurance executive.

Still, doubts linger about whether the lender can hit the profit targets outlined in its CEO's strategic plan, which was unveiled one year ago.

"They were too optimistic on the market when they drafted their strategy, " said Baader Helvea analyst Tomasz Grzelak.

Mr. Khan, who was named CEO of the bank's international wealth-management unit as part of Mr. Thiam's revamp, said two dreadful quarters following the strategic plan's disclosure didn't help. But he said morale endured: An internal survey of some of his senior staff last August showed 70% believed the unit would hit its targets. "I'd have never expected to see 70%," Mr. Khan said.

Investors have begun showing some faith, too.

Credit Suisse's stock price, which slid below 10 Swiss francs ($10.11) in the summer--the lowest in decades--has recovered to more than 13 francs a share, aided in part by a better-than-expected second-quarter profit. But the stock remains down about 40% since Mr. Thiam's revamp was unveiled on Oct. 21, 2015. The Stoxx Europe 600 Banks index has declined about 20% over the same period.

A cornerstone of Mr. Thiam's plan, a priority shift away from relatively volatile investment banking to wealth management, has won praise from analysts and investors who like the idea of the historically more stable, fee-based business of managing portfolios for wealthy clients.

But the timing proved unfortunate. Markets grew more risk-averse after Credit Suisse disclosed its new direction, as did wealth-management clients. It suddenly became more challenging to sell off chunks of the investment-banking business. The shift also meant moving the bank's center of gravity from the investment-banking hub of New York back to Switzerland, alienating some U.S.-based investment bankers.

Thomas Gottstein, a longtime Swiss executive at the bank, spent years wondering if Credit Suisse would re-embrace its local roots. "The Swiss business was treated as a cash cow" that funded other businesses in the past, Mr. Gottstein said. Now, as part of Mr. Thiam's revamp, Mr. Gottstein oversees the still-forming Swiss unit as a member of the bank's executive board.

The effort to cobble together the Swiss unit, expected to be completed next month, will cost 200 million francs this year alone. Its final shape remains unclear: It may ultimately include 7,000 employees, or 10,000, depending on which staff members are included.

The prospects are just as fuzzy for the planned partial initial public offering of the bank's Swiss unit before the end of next year, which could bring precious capital.

An offering could net as much as 4 billion francs for Credit Suisse. A separate capital raising last year brought in 6 billion francs, which Mr. Thiam has said gave the bank a "fighting chance" at its turnaround.

Despite pressure on Swiss banks from low client activity and higher compliance costs, Mr. Gottstein anticipates investor appetite for the partial IPO.

According to the bank's strategic plan, Mr. Gottstein's Swiss unit is expected to increase annual pretax profit from 1.6 billion francs in 2014 to 2.3 billion francs by 2018. He said the unit is "on the right track" to hit the target. Mr. Khan's business is also expected to significantly boost pretax profit by 2018, which he said will be "challenging" but manageable.

Doubts persist about those goals. "I think an update there is going to be necessary," said Vontobel analyst Andreas Venditti.

The bank faces other challenges, including an expected settlement with U.S. authorities over the selling of financial crisis-era mortgage securities. Analysts generally expect Credit Suisse to settle for about $2 billion.

Still, there are positive signals. The investment bank unit that advises companies on mergers has won recent deals including Bayer AG's $66 billion purchase of Monsanto Co., even as the trading unit has receded. Jim Amine, who leads the advisory unit, said it has thrived under Mr. Thiam: "He's been growing it, he hasn't been shrinking it."

After spending much of the year in an unwelcome spotlight, the bank as a whole has received a welcome respite.

Mr. Khan said there was a bright side to some of the recent troubles: They presented an opportunity to engage with customers.

The anxious client asking him about the bank's stability earlier this year, Mr. Khan said, has since committed more of his assets to Credit Suisse following those discussions.

"He felt we were being honest, and transparent," Mr. Khan said.

Write to John Letzing at john.letzing@wsj.com

(END) Dow Jones Newswires

October 20, 2016 10:25 ET (14:25 GMT)

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