Zurich Commenting on quarterly balance sheets is actually not one of the tasks of a chief supervisor. Nevertheless, Axel Lehmann, the Chairman of the Board of Directors of Credit Suisse, personally answered the analysts’ questions on Wednesday. The decisions that Lehmann made immediately before the publication of the half-year figures were too far-reaching – and their effects on the future of the bank, which had been in crisis for years, were too uncertain.
Lehmann announced a “comprehensive review” of the bank’s strategy. However, CEO Thomas Gottstein will not continue to work on their implementation: the CEO, who has been in office since the beginning of 2020, is resigning. His successor will be Ulrich Körner, as the bank announced on Wednesday. Körner has so far been head of asset management, the investment business with professional investors.
The timing of the replacement came as a surprise to many employees. Gottstein had been considered ailing for some time. But until recently, hardly anyone at Credit Suisse was counting on an end to the half-year figures, as talks with insiders make clear. The outgoing CEO also hinted at personal motives behind his resignation. He also made the decision for “private and health” reasons, Gottstein said on Wednesday.
The step had become necessary because the bank again had to admit a loss of CHF 1.6 billion, far more than analysts had expected. Worse, the result could only partially be explained by rising litigation costs or one-time write-downs.
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Rather, the core business came under pressure. Rich clients withdrew billions, recurring income from wealth management dwindled, and investment banking collapsed. “Our bank is undoubtedly facing a major transformation,” says Lehmann. “The disappointing performance has increased the urgency to act.” It is about accelerating the process that was initiated under Gottstein.
Investment bank comes into focus
The focus of the conversion is the investment bank. It should be transformed into a “capital-saving, advice-oriented banking business and a more focused market business”. In doing so, Lehmann is following the example set by UBS. The process of withdrawing capital from the investment bank and putting it into less risky business models is also to be accelerated. But with what effects?
“The disappointing performance has increased the urgency to act.” Axel Lehmann, Chairman of the Board of Directors of Credit Suisse
Credit Suisse has always seen itself as an entrepreneurial bank that is willing to take greater risks than others on the side of its entrepreneurial clients. However, this also means that it accompanies risky company takeovers by private equity funds and provides the necessary outside capital.
The Credit Suisse scandals
This so-called leveraged finance business has recently cost the bank dearly. She has to write off a three-digit million amount on it. In addition, Credit Suisse’s capital market business practically came to a standstill. The traditionally strong bond trading also weakened. According to Lehmann, the aim is to better harmonize the capital market business with the needs of customers in asset management in the future.
A statement that sounds like a criticism of the current investment banking boss Christian Meissner. He started a little over a year ago in order to dovetail investment banking and asset management more closely. Meissner is considered the big loser in the restructuring, especially since he has been given two co-heads of banking and markets. The “Financial Times” has already reported that the top banker is about to say goodbye.
It also comes as a surprise that Meissner’s time at Credit Suisse seems to be coming to an end. The Austrian with many years of Wall Street experience was considered the link between the Swiss-style asset management and the American-dominated investment bank. “He keeps the store together,” says a high-ranking CS banker. Some even believed he would one day inherit Gottstein.
Ulrich Körner: Experienced turnaround manager
Ulrich Körner now has to fill this job. He is considered an experienced turnaround manager. Until 2009 he managed the Swiss business of Credit Suisse before moving to competitor UBS. The realignment of asset management at UBS counts as his masterpiece. He should also do something similar at Credit Suisse. He returned in early 2021 as head of asset management.
Now his task is much greater: Because wealth management, the most important business area of Credit Suisse, slipped significantly into the red in the second quarter. One reason was a series of write-downs. But even on an adjusted basis, which excludes these one-time items, the division’s pre-tax profit declined 74 percent.
Also the asset management division for which Körner is responsible is anything but good: it did benefit from a profitable sale of a stake in Japan, which almost tripled pre-tax profit compared to the same period last year. But if you factor out this special effect, the bottom line is a slump in pre-tax profit by 56 percent. In addition, the division with assets under management of CHF 400 billion is actually too small compared to the industry.
The timing of his replacement came as a surprise to many employees.
(Photo: © 2019 Bloomberg Finance LP)
And then there is the problem of refinancing: A successor for the outgoing CFO David Mathers has not yet been found. At the same time, the bank wants to issue so-called AT1 bonds worth billions, because these can also be attributed to equity. The bank recently had to shell out interest of over nine percent for these interest-bearing securities. In addition, it is examining a partial sale of the profitable but capital-intensive business with structured products, such as warrants and derivatives.
The analysts remain skeptical: “Good luck raising capital for the structured products business,” scoffed JP Morgan analyst Kian Abouhossein. Anke Reingen, analyst at RBC Capital Markets, said: “Strategic changes make sense.” But given its capital ratio of 13.5 percent, the bank has little flexibility.
However, Lehmann wants to create this flexibility with a “rigorous focus on costs”, as he says. Operating costs are expected to fall from the current CHF 16.8 billion to less than CHF 15.5 billion. However, Lehmann did not want to commit himself to how many jobs that would cost.
The newly formed management team around Axel Lehmann and Ulrich Körner has a strategic advantage: They have known each other for years from their time together at UBS. With Markus Diethelm as chief lawyer, a third ex-UBS employee plays an important role in the restructuring of the group, as he has to clear the legal legacy. This makes the work on the board easier, according to industry circles.
However, this does not make a takeover by the competitor UBS, which has repeatedly been speculated about in Zurich, any more likely. UBS CEO Ralph Hamers sees the biggest growth opportunities in US wealth management – a market in which Credit Suisse is notoriously weak. So why, industry insiders wonder, should UBS undertake such a risky takeover?
More: UBS is also feeling the effects of the downturn