Wed, Mar 8th 2023
Credit Suisse’s biggest shareholder, U.S. investment firm Harris Associates, this week sold its entire stake in the bank after months of scandals, plummeting stock prices and a mass exodus of major clients.
Harris Associates owned as much as 10% of Credit Suisse’s stock in 2022. In fact, the firm’s CIO David Herro has been one of the most outspoken supporters of Switzerland’s second largest bank up until last fall when Saudi National Bank replaced Harris Associates as its top investor.
“There is a question about the future of the franchise. There have been large outflows from wealth management,” Herro told the Financial Times, referring to the more than CHF110 billion outflow of client cash in the last quarter of 2022.
“We have lots of other options to invest,” he said, adding that “rising interest rates mean lots of European financials are headed in the other direction. Why go for something that is burning capital when the rest of the sector is now generating it?”
Credit Suisse has been plagued by years of scandals, court cases, and record-breaking losses. The bank dropped from a profit of CHF 2.7 billion in 2020 to a loss of CHF 1.65 billion in 2021, mostly due to bad investments in failed supply chain group Greensill and hedge fund group Archegos. In the 2021 collapse of the hedge fund, U.S. authorities have charged Archegos’ founder Bill Hwang and three colleagues with racketeering and fraud charges.
In October of 2021, U.S. and U.K. authorities handed down a verdict that Credit Suisse must pay CHF 439 million to resolve a Mozambican corruption scandal which included bribery and fraud charges. The same week, the Swiss Financial Market Supervisory Authority announced it had discovered “serious organization shortcomings” in its investigation into a corporate espionage case that began with a 2020 audit of the bank. According to the investigation, Credit Suisse spied on members of its board and former employees. By 2022, bad headlines became synonymous with the bank and #DebitSuisse was trending on Twitter.
In October of 2022, Credit Suisse Chairman Axel Lehmann made an attempt to shore up confidence by announcing a radical restructuring plan, but rumors of its true financial health scared off many of their wealth management clients. UBS was the main recipient of customers pulling their cash out of Credit Suisse accounts. UBS saw a 23% increase in pre-tax profits for its last quarter of 2023, thanks to an influx of Credit Suisse clients. (Last week’s Credit Suisse scandal: Client data stolen).
Under the proposed restructuring plan, trading will now serve the needs of the bank’s wealth clients, while working in tandem with its newly created investment bank CS First Boston (CSFB). Trading at Credit Suisse has made up about 26% of its revenue in the past; by 2025, it will make up about 15%, according to the bank. But convincing investors that the bank can make it to 2025 may be a challenging task.
“No business is viable when its revenues vanish and expenses continue,” London Institute of Banking & Finance professor Peter Hahn told Reuters. “Cost-cutting and efficiency can improve the profitability of a leading or even marginal business, but not a failing business.”
In the last three months of the year, Credit Suisse saw a 95% decline in equities trading alone, according to Reuters. One option to get Credit Suisse back on its feet would be to move its equities to CSFB. Another option would be to slim down the equities business altogether.
“There are key question marks around the importance of the equities business given it requires huge scale to make it economically viable,” Keefe, Bruyette & Woods analyst Thomas Hallett said, adding that Credit Suisse “is stuck between a rock and a hard place.”
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