REWIND A YEAR or so: in October 2015, Credit Suisse reinforced its ambition to be a wealth manager with good IB back-up and a balanced geographical approach between developed and emerging markets. This, it believed, would generate significant value for shareholders over time.
Fast-forward that year and the strategy re-articulated by CEO Tidjane Thiam at the bank’s investor day on December 7 hasn’t changed. The only problem is: the market hasn’t played ball with the metrics he laid out back in October 2015.
So here’s my question: can a CEO be blamed for not better prognosticating future market conditions or for not leaving enough room for manoeuvre just in case? After all, setting targets leads to some pretty serious expectation-setting vis-à-vis stakeholders.
Foretelling the future - or modelling forward outcomes in bank or consultant-speak - arguably should to some extent be in the CEO’s playbook.
That said, market conditions have been tough and unpredictable this past year. We live in a highly uncertain world with a lot of moving targets. So to be fair, I don’t think you can really fault Thiam and his entourage for coming back and having another go.
James Chappell, a bank analyst at Berenberg Bank, is sceptical about the latest targets. He reckons in order to hit the targets implied from the investor day, CS would need to grow revenues to at least SFr23bn in 2018 relative to 2016’s expected revenues of SFr19.8bn. That, he wrote, implies 8% revenue growth in each of the next two years “which we see as heroic considering the headwinds we expect for the sector … all banks that have tried to shrink their way to profitability have found that revenues fall faster than costs and we see CS as no different”.
That’s pretty blunt. But then again Thiam did create room for doubt, even if he also pointed to some successes.
Acknowledging that meeting profit targets will be geared more to cost reductions than to revenue growth points to a very different way of looking at the world. And a far more depressing way at that. Saying your cost-driven approach allows you to capture potential upside if market conditions improve is nothing more than a statement of fact, but it’s also an admission of how little control you believe you have over your own future.
That said, it’s not an unreasonable way of viewing the world. And let’s be clear: Thiam is hardly alone among bank CEOs in thinking this way.
But where does this most recent reappraisal leave Credit Suisse? In truth it’s a story of shades of grey and a difficult one to call.
The group may have been SFr200m ahead of its 2016 SFr1.4bn net cost savings target at the nine-month stage, but Thiam is whacking the bank for another SFr1bn in savings to end-2018 to get costs below SFr17bn. The CEO said that would make the bank more resilient through the cycle (which is what was implied when he set targets last year).
ON THE PLUS side, CS did point to significantly higher assets under management as a result of the group’s UHNWI and entrepreneur focus; and we were told CS is more or less done with GM right-sizing.
Actually, the prognosis for GM was more positively nuanced than it’s been for a while. The division is operating below its US$60bn end-2016 RWA ceiling and is approaching its end-2018 target cost base of US$5.4bn.
GM’s 15% return on regulatory capital was confirmed and the bank said the focus was now shifting to driving revenues. That’s pretty upbeat because once that pivot point is reached, inter-divisional synergies can kick in and create a much more virtuous circle.
Investment Banking & Capital Markets kept its 15%-20% return target and the bank pointed to wallet-share gains thanks to the rebalancing to M&A and ECM and towards investment-grade corporate clients.
And not all targets were redone: the Swiss Universal Bank kept its 2018 pre-tax income target of SFr2.3bn; International Wealth Management was adjusted down but only because of lower performance fees in AM; APAC had its overall revenue target adjusted to SFr1.6bn, but Asia wealth management was unchanged. It was APAC IB that let the side down thanks to lower market volumes and capital markets activity.
Of course, that jives with the troubles other firms have been having in Asia-Pacific: both Goldman Sachs and Bank of America Merrill Lynch have slashed costs and headcount to take account of lower activity.
Elsewhere, RWAs in CS’s strategic resolution unit are down by a third, and capital and balance-sheet usage are significantly reduced with lower-than-expected exit costs. The 12% look-through CET1 capital ratio at the nine-month stage was the group’s highest-ever reported level, equivalent to a 180bp year-over-year uplift.
All-in-all, I’d say there are some positives in there even if they’re wrapped in caution. CS’s shares gained both before and after the investor day.
Shares gave up some of those gains in Friday’s morning session and they’re still trading at a discount to tangible book value (although nothing like epic Deutsche Bank proportions). If nothing else, shares are at levels not seen since February. In the skittish and unforgiving world we inhabit, that’s a reward worth taking.
