As rivals pull back from Asia, Credit Suisse chief executive Tidjane Thiam is pushing ahead in the hope of managing the fortunes of the region’s rich. But some say his goals are too optimistic.
Spread out across the ornate dining room at Chijmes Hall in Singapore were wealthy tech entrepreneurs from India and China, airline executives from Malaysia and several founders of Indonesian conglomerates - all drawn by the opportunity to be wined and dined by Tidjane Thiam, chief executive of Credit Suisse.
The collective wealth in the room at the event in mid October - about $500 billion (CHF494 billion) - could have bought and sold Mr Thiam’s bank 16 times over. For Mr Thiam, who is making a big bet that Credit Suisse’s future growth will come from managing wealthy Asians’ money, this is good company to keep.
Having built his name in Asia at Prudential, Mr Thiam is clearly comfortable in this setting. “He’s a little bit of a celebrity in Asia,” says a colleague. “The client gets so dazzled.”
But after 16 months of running Switzerland’s second-biggest bank, Mr Thiam seems to be have problems everywhere else. In New York, the markets desk staged a revolt after being criticised for a $1 billion trading loss. In Zurich, there has been discussion in the media about whether he would be sacked. In London, morale is low after thousands of job cuts. To top it off, the bank’s shares have fallen as much as 55 per cent since he took over.
Ironically it is in Mr Thiam’s comfort zone of Asia where he is facing perhaps the most scepticism. His plan to aggressively expand Credit Suisse’s business in the region comes as many of the bank’s rivals are pulling back as Chinese growth slows. Goldman Sachs is cutting 15 per cent of its investment bankers in the Asia-Pacific region and ABN Amro is selling its Asian private bank. Several others have already made cuts in Asia.
It is not all one-way traffic - Swiss counterparts UBS and Julius Baer are also expanding in Asia - but Credit Suisse is pushing hardest. By promising to more than double the region’s pre-tax profit from 2014 to 2018, Mr Thiam has made a bold call. The chief executive insists he has not “bet the bank” on the Asia-Pacific region, he says in an interview, but he remains convinced of “the ability of Asians to surprise the world positively”.
If he is wrong, “it would be a huge problem for the world, because 70 per cent of mankind live in Asia”, he says. “If we take it that 70 per cent of mankind is going to fail economically I think it’s a big problem and not just for Credit Suisse.”
Many have doubts, however. “If there is overcapacity anywhere in the banking world right now it is in private banking in Asia,” says Bernstein analyst Chirantan Barua. “Every Tom, Dick and Harry has a private bank.”
Mr Thiam is an outsider to banking and to Switzerland. A national of both Ivory Coast and France who served as a government minister in Abidjan before working at the World Bank, McKinsey and the Pru, he has been in banking for less than two years.
One of Mr Thiam’s favourite statistics is that Asia is home to 76 per cent of all family-owned businesses worth more than $1 million. That creates fertile ground for Credit Suisse’s investment bank, which can help families sell their holdings, and its private bank, which can then take over the management of their newfound cash.
He and his executives are fond of reeling off data about the rise of Asia’s super-rich. The region was the leader in wealth creation in 2015 and is expected to dominate for the next decade as well, according to research from Capgemini’s wealth consultancy. More wealth equals more demand for wealth management.
Mr Thiam gives short shrift to a question about whether this extra wealth management business will flow to Credit Suisse. “There is no indication that we will not do well,” he says.
Credit Suisse executives in the region say the bank is particularly well positioned to grow now that Mr Thiam has created a standalone regional unit to replace the previous structure, where divisions reported to global bosses in London, New York and Zurich. “This (new structure) is going to be a massive advantage for Credit Suisse,” says one executive. “Nobody runs their business like this. The region is empowered. It is closer to clients.”
Bankers are incentivised to work more closely with all parts of the Asia-Pacific business as their compensation is linked to the unit’s performance. In one example, investment bankers are offering fee discounts to clients willing to put the proceeds of their deals into the private bank. So far in 2016, those investment bankers based in the region have referred more than $1 billion of client money to the bank.
Credit Suisse has begun taking equity stakes in the ventures of a handful of clients, like putting $20 million into the financing arm being spun off by China’s Hero Corporation, a family-owned business. Credit Suisse was able to win additional business from Hero “because we did what we would call a small investment”, one banker said.
Beyond the private bank, Credit Suisse is improving the economics of its Asian investment banking division by installing “hungry directors” to replace “fat-cat managing directors” who have been sacked, one executive says. The division, which advises clients on deals and capital raising, expects to post a 26 per cent rise in revenues and a 4 per cent fall in costs for 2016, he adds. It has slowed hiring to reflect market conditions, as has the region’s global markets operation.
Time to refresh?
So what’s not to love about the strategy? Analysts have found plenty. They see potential problems in the equity investments, which tend to be illiquid and could be high risk, and the expansion in private bank lending, which could result in loan losses if pressure to hit ambitious targets drives bankers to take imprudent risks.
Some of the bank’s rivals say competition has made hiring more expensive and the business less profitable. Credit Suisse, which hired 100 private bankers in the first half of the year, dismisses such suggestions.
Mr Thiam also hits back at the concerns on lending, objecting to the idea that they are even making loans. They are not lending, he says, they are “monetising assets” by letting rich Asians borrow against their business.
A board member says Credit Suisse is “cognisant of the risks” in the region and has put control structures in place. “You don’t want to grow too fast at the price of subsequent problems - but we know that,” he adds. Risk and compliance for the region are still part of Credit Suisse’s global infrastructure so there is no prospect of the division becoming the “wild west” of the bank, one executive says.
The biggest concern that most analysts cite is a more general one. “I get the strategy, I think it’s probably the right way to go,” says one analyst. “What I’m struggling with seriously is what sort of revenue trajectory you would need to to get to the CHF2 billion number [for pre-tax profits] so quickly.”
Kinner Lakhani, head of European banks research at Deutsche Bank, says Credit Suisse’s Asia-Pacific earnings target looked as though it was “set in a straight line” and assumed annual growth would continue at its 2014-15 rate.
“In the first half of last year the stars were perfectly aligned in Asia,” he says. Now the situation has changed and “you have to refresh your views to be taken seriously”.
Kian Abouhossein, head of European banks research at JPMorgan, says Credit Suisse should use its investor day in December to temper its ambitions. “We would argue that a more realistic plan that sees a slower expansion of private banking advisers - which brings additional cost before you have revenue penetration - would be welcome at this point,” he says.
DoJ fine looms
“It’s not all about Asia” - as Mr Thiam emphasises repeatedly over two and a half hours of interviews.
“We’re seeing quarter after quarter indicators that show that the strategy is actually delivering on every single item,” he says, describing record levels of assets under management at its private bank, an improvement in league table rankings at its investment bank and a global markets business that has finally been reshaped to fit today’s regulatory and commercial climate.
Still, analysts predict its international wealth management business will fall 33 per cent short of the 2018 profits Credit Suisse has promised, while its Swiss business is expected to make 13 per less than Credit Suisse has projected. Similar comparisons are not possible for the global markets or investment banking divisions because Credit Suisse did not publish pre-tax profit forecasts.
An impending fine from the US Department of Justice, for allegedly mis-selling US mortgage bonds, threatens to reignite fears about the bank’s capital adequacy, which Mr Thiam tried to banish by raising CHF6 billion last year. Deutsche Bank was initially asked to pay $14 billion for a similar infraction. Analysts expect Credit Suisse’s potential fine to be in the billions of dollars. Mr Thiam is usually expansive but the topic strikes him silent - as does a question about the effect of Donald Trump becoming president in the US.
He is only marginally more willing to be drawn on the gulf between what Credit Suisse says it can earn and what analysts expect, because “it’s not what drives what we do everyday”.
He says: “The bank needed to have a very clear ambition and yes, markets blew up right after we published the strategy [in October 2015]. We are a market-based activity, we are exposed to the market. The way we’re going to create value is by actually delivering over and above what the market expects.”
Mr Thiam says serious investors understand Credit Suisse’s progress and that its three biggest shareholders have bought an extra CHF2 billion of shares in the past eight weeks. David Herro, chief investment officer of Harris Associates’ international business, is one of those big investors. He says Harris owns more than 9 per cent of the bank, up from the 7 per cent it held when Mr Thiam announced his restructuring plans.
“I think whatever the management thinks they should deliver they should promise about 85 per cent of it,” says Mr Herro. “My hope is that it’s actually conservative. If you look at the valuation of this business, there is still tremendous opportunity for the price to appreciate.”
Shares have risen to about CHF14, well up on the low of CHF9.91 in July but worse than the CHF22 at which they were trading when the plan was announced last year.
The big investors’ purchases have helped, of course, but they are not the only ones buying. “Clients tell me I’m going to buy, and I’ve seen them buy,” says Mr Thiam.
Credit Suisse’s full board accompanied Mr Thiam to the billionaire-packed dinner in Singapore. If board members play their cards right, maybe next year’s dinner could pass for their AGM.
Swiss model: Radical rethinks after clampdown on tax evasion
Swiss banks have had to radically rethink their business models over the past decade.
In the wake of the global financial crisis of 2007-08, UBS - Credit Suisse’s main domestic rival - came close to collapse as a result of subprime liabilities. In 2012 it began to focus on global wealth management, which has enabled it to ride out this year’s financial market turbulence better than European rivals.
Credit Suisse’s strategic overhaul three years later was largely the result of higher costs resulting from stricter rules imposed on Switzerland’s largest banks.
But Swiss banks have also had to respond to the global clampdown on tax evasion. Since 2007, Swiss banks have paid more than $5bn in penalties and compensation related to claims they helped US clients sidestep tax collectors.
From next year, agreements aimed at clamping down on tax evasion by allowing the automatic exchange of information come into force between Switzerland and other countries, including EU states.
That has added pressure on Swiss banks to offer better investment performance to clients - Swiss bank accounts are no longer the place to hide money from authorities - and to expand their businesses into other regions, including emerging markets.
But the Swiss authorities have warned that aggressive overseas expansion strategies have dangers. Swiss banks “are increasingly accepting money from faraway, previously less familiar markets,” says Mark Branson, head of the Finma financial supervisor. “What we are seeing here is a shift away from risks connected with tax law towards money laundering risks.”
Copyright The Financial Times Limited 2016