HAVE THINGS GOT so bad at Deutsche Bank and Credit Suisse that swirling chatter about break-up and solvency can be taken seriously? Is there a risk that Tidjane Thiam and John Cryan could lose, are in fact losing or indeed have already lost the confidence of their boards, executives, employees, shareholders and the broader ecosystem as they struggle to convince anyone (really) that their strategies are rock-solid and credible?
Barely-contained panic around those two names is palpable. I loved the piece on the website of India’s Economic Times that pointed out that HDFC Bank, India’s second-largest private lender by assets, had overtaken Deutsche Bank, Credit Suisse and SocGen in market cap.
Given the pounding CS and DB stock and subordinated paper has taken this year – shares down 40%-plus on both counts and trading at an alarming 0.4x of tangible book value – I’d say ‘yes’ to break-up as an option being believable as room for manoeuvre diminishes and patience runs out. Credit Suisse is the most obvious candidate in this regard.
Talk of solvency issues is probably premature at this point – especially in the case of DB, as it’s inconceivable that Wolfgang Schaeuble wouldn’t bail it out or backstop it in some form or another. That said, activity in the CDS market has galvanised around CS and DB and both names have been quoted at levels not seen since the eurozone crisis.
We probably all know idiosyncratic risk when we see it. The point at which multiple parallel idiosyncratic risk events become conflated with market risk is a fascinating topic (for another day). We may well be in that confusing twilight zone where investors are confused about whether they should be prioritising macro factors over single-name factors or vice versa. Or whether equities should lead credit or vice versa. But however you analyse the world, CS and DB have been caught in the vice-like grip of market attention.
Have their AT1s fallen into stressed territory over technical concerns around coupon stoppers being invoked, or because of tanking stock prices as profitability concerns mount amid multiple headwinds? It’s a moot point. (I note, incidentally, that long equities/short AT1s has gained momentum as a trade as the valuation mis-match falls into line and the upside potential in a crisis actually favours equities). Has the rout all been a bit overdone? Almost certainly.
Market headwinds are one thing; lack of confidence about individual bank strategies (DB, CS – and Barclays for that matter) and the performance and credibility of CEOs are another thing altogether. If, in the wake of that lack of confidence, sum-of-the-parts analysis suggests that the costs of maintaining a whole with limited divisional cross-over may exceed the benefits; that leaves little room for doubt as far as potential future directions are concerned.
I’VE TENDED TO be sceptical about the value of bank break-ups, but I’m starting to wonder. Why do I say that Credit Suisse is the most obvious candidate in this regard?
First of all, because Thiam has created a decentralised organisation with three monolithic stand-alone divisions – one of which is being floated. He has made it crystal clear at every opportunity that the future of CS is as an Asia-focused EM private bank predominantly targeting ultra-high net worth entrepreneurs.
How big an investment bank do you realistically need to support such a narrow client base? You absolutely do need an investment bank, as those clients are serial users of most products and services in the IB toolkit, from lending and financing, advice to trading to prime and support services. But do you need thousands of people? Hardly. I’d say you need a boutique-style operation at best. Going a step further, do you even need to have most of those services in-house? Why not buy capacity in? In a world of anonymised electronic liquidity sourcing, that’s easy to do.
Gutting the investment bank of capital and tapping it for many of the planned SFr3.5bn of cost savings has boutique writ large. Macro trading is for the chop; equities and prime services are being de-emphasised; the bank will be making a ton of headcount reductions in its IB home, London.
What does that leave? It kind of leaves what is actually a credible investment bank with best-in-class leveraged finance and structured finance capabilities all dressed up and nowhere to go.
When Thiam talks of implementing a streamlined organisational structure through the Swiss universal bank, Asia-Pacific, and international wealth management (serving Western Europe, CEE, LatAm and Africa) supported by two right-sized supporting IB service providers (global markets; and investment banking and capital markets), most people see a group lacking any real coherence or a strong raison d’etre. What people inside CS say is that splitting the group up would result in a loss in value proposition and that the business model relies on having strong investment banking capabilities driving wealth management through the divisions.
If Thiam is going to IPO the Swiss business, I’m increasingly falling behind those who say he should also IPO the APAC business that is at the core of the strategy and then go all out and ditch the investment bank as a standalone business altogether and maintain a small advisory and execution function embedded within the core businesses; maybe carving out the high-yield and ABS/MBS businesses for sale.
Beyond treacherous global markets, I’m hearing that Credit Suisse folk are deeply demoralised – not just the traders but people in wealth management too – sceptical about their boss’s ability to convince anyone to share his own conviction around the strategy. Desperate times call for desperate and radical measures.
