Uncertainty that bank can hit profit targets cited by CEO Thiam
a year ago remains
By John Letzing
ZURICH -- Credit Suisse Group 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 beset by quarterly losses, publicized
infighting and a tumbling share price as its broad strategic shift
began.
A year after Chief Executive Tidjane Thiam unveiled his plan to
turn around the struggling lender, Credit Suisse has begun to find
its footing. Still, doubts linger about whether the bank can hit
the profit targets he outlined on Oct. 21, 2015.
The backdrop across the European banking sector since then:
negative interest rates, heightened regulation and a grim
investment outlook.
"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 richly detailed plan was unveiled.
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 back to
Switzerland from the investment-banking hub of New York, 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 new structure, 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 the pressure on Swiss lenders now 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 also is
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 21, 2016 02:47 ET (06:47 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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