In early 2013, Credit Suisse’s top management was convinced that it had adapted to the much stricter rules that have been ushered in since the financial crisis.
“We are the only bank operating under Basel III rules for both capital and liquidity,” Gael de Boissard, co-head of Credit Suisse’s investment bank, said at the time. “We are putting the finishing touches to this implementation process while other firms have only just started to change their business model and clean out legacy assets.”
Yet almost two years and three investment bank restructurings later, some investors are becoming impatient about what they see as the Swiss lender’s piecemeal strategy and a history of over-optimistic forecasts.
“I have some sympathy with them saying ‘we don’t need to rush’,” one top 30 investor says. “What I don’t have sympathy for is that they keep missing targets and finding excuses for it.”
Rather than putting the finishing touches to the investment bank, Brady Dougan, Credit Suisse’s chief executive, has had to make three more attempts to scale back various parts of the division.
Last autumn, the Swiss group announced deep cuts to its rates trading business; this summer it said it would exit commodities trading. And in October, it said it would reduce its assets in the investment bank by another CHF70 billion ($72 billion).
Yet despite these moves, Credit Suisse has rarely come close to meeting most of its “key performance targets”. Its return on equity attributable to shareholders languished at 3.7 per cent in the first nine months of 2014, far below its target of more than 15 per cent over a three- to five-year period across market cycles.
Other objectives, such as a cost-to- income ratio of below 70 per cent and a better total shareholder return than its peer group, have also mostly been missed.
“It is the RoE number that frustrates,” one top 40 investor says. “I don’t think anyone has got 15 per cent in their numbers. From the outside, the target really looks too high.”
The bank’s returns this year have been depressed by factors such as the $2.6 billion fine it received for helping American clients evade taxes. But people close to the non-executive board acknowledge that management has its work cut out. They also say that the 15 per cent target was designed to be stretched and may need to be reviewed once there is greater clarity about the regulatory landscape which, six years after the onset of the financial crisis, has not yet settled.
Investors, analysts and even rival bankers stress that Mr Dougan – who, having taken the helm in 2007, is one of the longest-serving chief executives in global banking – has steered Credit Suisse accident-free through the financial crisis. Through that long-term lens, the bank’s share price still outperforms rival UBS, which had to be bailed out during the crisis.
It is in the period since late 2011 – when UBS made its first step towards what would a year later turn into a radical downsizing of the investment bank – that Credit Suisse has underperformed.
Since November 2011, Credit Suisse’s shares have risen by 14.55 per cent, while UBS’s have risen by 65.10 per cent. That has left Credit Suisse’s shares trading at 0.97 times their book value, while UBS’s trade at a multiple of 1.38.
“Credit Suisse management’s stewardship through the crisis has been one of the better ones but they probably misjudged what happened on the regulatory front,” says Philippe Bodereau, global head of financial research at Pimco.
The welter of regulation since the financial crisis has made some once-lucrative areas of investment banking, particularly on the trading side, uneconomic. But whereas UBS responded to these pressures by exiting large parts of its capital-intensive fixed income business, Credit Suisse has persisted with a far bigger investment bank.
This is in part because its investment bank has traditionally been much stronger than UBS’s, while its private bank is far smaller. “In my opinion, it certainly does not make any sense for Credit Suisse to go down the same strategic route as UBS,” says Andreas Venditti, an analyst at Vontobel.
Analysts also say there is some justification to Credit Suisse’s reluctance to make far-reaching decisions before global regulations are more settled.
“Credit Suisse is still a work in progress, but that is partly because the regulatory framework is a work in progress,” says Kinner Lakhani, an analyst at Citi, pointing out that the outcome of a review of the risk-weightings in banks’ trading books and a long-awaited review of Switzerland’s leverage rules remain uncertain.
Nonetheless, Credit Suisse’s lack of progress in cutting leverage worries some investors. Over the past 12 months, the bank’s leverage exposure under Swiss rules has drifted up from CHF1.12 trillion to CHF1.19 trillion. The lender aims to be at CHF1.05 trillion by the end of 2015.
“The market is very concerned about the leverage ratio, and it will not be forgiving at all if they miss out on their target. Management life is going to be very difficult if they don’t hit it by the end of next year,” says a top 30 investor.
If Credit Suisse can improve its leverage ratio, and markets turn – the bank is seen by analysts as one of those best-placed to profit from rising rates and a stronger US recovery – investor sentiment towards it is likely to improve.
If it fails, however, investors could become more restless.
Copyright The Financial Times Limited 2014