The Credit Suisse businesses at stake as executives mull future

CREDIT Suisse Group board members are huddled in Singapore, deep in discussion on what exactly they should keep from the once-storied investment bank and what they should jettison to put a stop to billions of dollars in losses and reputational hits.

Since naming a new chief executive officer a little over a month ago, the Swiss lender has mentioned only one unit by name that’s likely to see changes: the securitised products group that traces its roots back to Wall Street’s raucous mortgage-bond scene in the 1980s. And even there, executives wavered when asked about details.

Behind the scenes, however, more radical scenarios are being discussed. As much as two-thirds of the investment bank could eventually be on the block in the most extreme case, people familiar with the thinking inside the bank have said.

Here are some of the businesses that executives will be looking at:

Fixed-income trading

Fixed-income trading is usually the biggest provider of revenue in the investment bank, but it also uses a lot of capital, making it a prime target for efforts to reduce risk and costs. Not much of the trading here benefits Credit Suisse’s wealthy clients because it’s complex and usually reserved for institutions and the most sophisticated investors.

The business includes the securitised products group, which buys and sells securities backed by pools of mortgages and other assets and has been a major revenue contributor - and a source of surprise losses. Executives have said they wanted to avoid an outright sale of the unit and instead attract outside capital, but analysts questioned whether that was realistic. Selling the whole SPG, at book value, could free up 3 billion francs of capital, according to Deutsche Bank.

Similarly, trading in more complex credit products could be downsized because it has few links to wealth management clients. Rates trading is an area where the bank could exit completely, having trimmed it down to a bare minimum under former CEO Tidjane Thiam.

The bank’s emerging markets trading platform as well as its foreign exchange products, on the other hand, have more obvious links to Credit Suisse’s rich clients. That’s because a large portion of the most active wealthy customers are in Asia Pacific, Latin America and the Middle East.

Equities trading

Equities trading generally binds less capital than fixed income, and wealthy clients like to trade stocks, making it less of a target for cuts, according to Deutsche Bank. But the business also requires investments in technology, especially where it caters to institutional clients.

SEE ALSO

Credit Suisse plans 3,200 job cuts in Zurich: Blick newspaper

Credit Suisse is chasing a broader set of the global wealthy

One relatively straightforward way for Credit Suisse to reduce costs would be a more decisive retreat from equities trading for institutional clients while keeping a limited team that could cater to the wealthy who trade stocks.

The unit has been shrinking since it was devastated early last year by the collapse of Archegos Capital Management, prompting the Swiss bank to exit the business that serves hedge funds. Equities trading generated only 834 million Swiss francs revenue in the first half of the year, down from 1.28 billion Swiss francs 2 years earlier.

Deal-making

Credit Suisse is likely to hang on to its bankers who advise companies on mergers and acquisitions after saying last month that it would “transform the investment bank into a capital-light, advisory-led banking business”.

Advisory was the only division within the investment bank unit to increase revenue in the second quarter. The Swiss bank generates more money in this area than several European competitors and benefits from its ability to tap clients in wealth management for deals.

Deutsche Bank analysts, however, have questioned whether it makes sense for Credit Suisse to rebuild that franchise in the US, where it has had high staff turnover, and where it’s lacking wealth management clients.

Capital markets

Credit Suisse has been pummelled in the business of arranging equity and debt financing for companies, with revenue in that business almost wiped out in the second quarter. That may not change much in the near future as higher interest rates force investors to rethink the risk of handing over their money to companies.

Previously the bank made lots of profit from Chinese companies listing in the US, and it was also a go-to adviser for special-purpose acquisition companies (SPACs). That craze has ended, meaning executives will probably take a look at the highly paid specialists behind such deals.

Similarly, higher rates have hurt the business of arranging loans for highly indebted companies. Credit Suisse has traditionally been one of the top banks in leveraged finance, yet after years of booming fees, it and other global banks took a hit in the second quarter. The bank has already begun cutting exposure to non-investment grade debt and shifting its underwriting business towards higher-rated corporates.

Credit Suisse still has broad industry coverage and could take a page out of competitor UBS Group’s book. The Zurich rival some time ago merged its equity capital markets and debt capital markets teams and formed 4 “supersectors” to cover industries where it had the best expertise. BLOOMBERG