Bank reports billions in loss – customer funds flow out

Zurich Credit Suisse wants to leave the permanent crisis behind with a shrunken investment bank, a capital increase worth billions and extensive job cuts. This was announced by the second largest Swiss bank on Thursday in Zurich.

“This is a historic moment for Credit Suisse,” said CEO Ulrich Körner. “We are fundamentally transforming the investment bank to create a new bank that is simpler, more stable, and whose business model is more customer-centric.”

The restructuring plans were less well received by the shareholders: the share fell by more than ten percent in the morning trading on Thursday.

The new strategy, on which CEO Körner has been working together with the Management Board team since taking office at the end of July, envisages, among other things, splitting the investment bank into four parts. The M&A and IPO advisory business is to be spun off under the CS First Boston brand. External investors should be able to participate in the new division.

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The profitable securitization business (Securitized Products Group) will also be opened up to external investors. The majority will be sold to a consortium led by private equity firm Apollo and asset manager Pimco.

Credit Suisse founds a kind of bad bank

In addition, Credit Suisse is establishing a so-called Capital Release Unit, a bad bank, with which the institute intends to process high-risk securities held off the balance sheet. Finally, trading in stocks, foreign exchange and bonds remains as the rest of the gutted investment bank. This should be geared more closely to the needs of wealthy private customers in asset management.

The aim is to distribute 80 percent of the capital employed between asset management, the Swiss universal bank and business with professional clients (asset management) by 2025. The fresh money needed for the restructuring of the group is to be raised through two capital increases totaling four billion francs. In the course of one of the two capital increases, the Saudi National Bank has become a major shareholder in Credit Suisse.

Almost six billion Swiss francs burned

In addition, the Swiss bank is intensifying its savings efforts: Körner has set the target of CHF 14.5 billion as the new cost basis for 2025. The head of the bank wants to save a billion more than previously planned. Most recently, the bank’s total costs were around CHF 16.8 billion. This is to be achieved, among other things, by massive job cuts, from currently around 52,000 to 43,000 in 2025.

Axel Lehmann, chairman of the bank, called the plan a “radical strategy and a clear implementation plan to create a stronger, more resilient and more efficient bank, focused on our customers and their needs”.

Andreas Venditti, analyst at Vontobel, warned: “Today’s announcement of the new strategic plan is just the first step in a lengthy process to restore credibility and regain stakeholder trust.” The bank could not afford any more missteps.

The collapse of the Archegos hedge fund, the freezing of the supply chain funds operated by the bankrupt fintech Greensill and numerous other legacy issues had recently shaken the confidence of customers and investors in the bank.

The figures for the third quarter, which were also presented on Thursday, show how necessary the restructuring of the group is: the net loss, which includes depreciation for the restructuring of the group, amounted to four billion francs. In total, Credit Suisse has already burned CHF 5.9 billion in the current year. The equity ratio (CET1 ratio) fell by 0.9 basis points to 12.6 percent compared to June and was thus below the target range of 13 to 14 percent.

Operationally, things were anything but smooth: from July to September of this year, the pre-tax loss was 342 million Swiss francs (344 million euros). In the same quarter of the previous year, there was still a pre-tax profit of one billion francs.

>> Read here: Credit Suisse makes former Deutsche Bank manager CFO

“The third quarter and the year to date in 2022 have been significantly impacted by the ongoing difficult market and macroeconomic conditions,” said Körner. This led to weaker results, particularly from the investment bank. There was a pre-tax loss of CHF 666 million. CFO Dixit Joshi also expects a loss for the fourth quarter.

The outflow of funds in asset management is particularly painful for the bank: customers withdrew CHF 6.5 billion there. The bank also lost customer funds on its Swiss home market and in business with professional investors.

Joshi confirmed that some of the outflows were related to social media rumors of an impending collapse at the bank that fueled a sharp rise in the cost of credit default swaps for Credit Suisse bonds in early October.

More: Credit Suisse division for securitized products to go to Apollo and Pimco

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