Credit Suisse’s ugly tactics prepare it for the worst

How do you solve the European sovereign debt crisis? Well, it’s complicated, obviously. But, from the flurry of metaphors that have been employed, it certainly appears to involve ripping off a plaster, grasping some nettles and – above all – for everyone to stop kicking cans down the road.

 

 Ben Wright

13 Feb 2012

Credit Suisse’s ugly tactics prepare it for the worst

Or, as a senior investment banker put it to me in a slightly less clichéd fashion last week, European politicians need to convince the markets that the worst day of the crisis was yesterday.

Companies and investors will only regain their confidence when they believe things have got as bad as they’re going to get. From that perspective, Greece’s exit from the eurozone might be a welcome development.

It would undoubtedly result in a huge amount of economic disruption and financial pain but it could also provide a full stop – a cathartic caesura – to the turmoil.

Strange, then, that while market participants and commentators are demanding that European policymakers start dealing with their real problems rather than pussyfooting around side issues, Credit Suisse’s fourth-quarter results, which were announced on Thursday last week, should be met with such opprobrium.

It is true that the numbers were ugly. Net income at the Swiss bank fell 60% to roughly Sfr2bn and the bank reported a fourth-quarter loss of Sfr637m. Shares in the bank duly fell from Sfr25.23 before the results were announced to Sfr23.50 as we were going to press – a near 7% drop.

But wasn’t the loss caused by the Swiss bank doing, in part at least, what the markets are demanding European policymakers have the courage to do?

The two main items that Credit Suisse highlighted as responsible for the loss were the cost of severance and restructuring, which was not expected, and losses made by the investment banking unit as it continues to reduce its risk-weighted assets and exit businesses, which was (sort of).

This is the kind of good housekeeping required of banks, countries and common currency zones, now that we all realise that credit does not grow on trees.

Part of the dismay was a result of the bank’s poor groundwork. Three months ago it merrily told everyone that the plans to deleverage would have little impact on revenues. Last week it admitted that hope was, er, more than a little optimistic.

Credit Suisse said the reduction in risk-weighted assets had exacerbated poor performance in fixed-income revenues, down from Sfr762m in the third quarter to a measly Sfr36m in the fourth. This, in turn, led to a pre-tax loss of Sfr1.3bn for the investment bank.

Of course, Credit Suisse, just like every other bank, was also hit by incredibly weak markets at the end of last year. This was aggravated by the fact that it was selling assets – and illiquid assets at that – and further compounded by the bank telling the whole market that it was going to sell them.

But equally, it could be argued that all of this pain demonstrates that chief executive Brady Dougan had the courage to stick by the strategy he articulated all through last year.

Realising that 2011 (and the last quarter in particular) was going to be a real stinker, Dougan may have decided to do a “kitchen-sink” job.
Indeed investment banking risk-weighted assets were reduced by Sfr47bn in the last three months of the year.

The bank thinks it can get rid of another Sfr33bn in the first quarter of this year and is well on the way to hitting its targets for group risk-weighted assets for the year.

Costs have also been sliced by Sfr1.2bn, bonuses have been nearly halved and the dividend has been cut.

Does this mean that Credit Suisse’s worst day was yesterday (or, more accurately, last Thursday)? That remains to be seen. More disposals will rack up more costs. The bank’s core Tier-1 capital ratio is 10.7% under Basel 2.5, which doesn’t look too bad.

But it admitted that number would shrink to 7.1% under Basel III. It has to achieve a ratio of 10% under this regime but, thankfully, not until 2018.

If markets improve this year, Credit Suisse may not be in a great position to take advantage. But if things get worse or – as now seems the most likely – the environment for investment banking proves to have changed irrevocably, Credit Suisse is in a much better position to cope now than it was six months ago.