Credit Suisse's Investment Bank Little More than a Sacrificial Pawn

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For decades, the investment banking business was the Swiss bank’s power base. With another capital increase looming, its only use now is to save the crisis-ridden institution.

The Investment Bank has been shrunk down to a shadow of its former self, as it teeters on the edge of viability with its roughly $60 billion in risk-weighted assets left.

Although claims to that effect were made by a Credit Suisse chairman, they weren’t from the current one, Axel Lehmann. It was Urs Rohner who maintained that in an interview with the «Aargauer Zeitung» (German only, paywall) only three years ago.

At the time, the business was the power base for Switzerland’s second-largest bank. Since then, it has produced – by far − the worst returns for the entire group. Despite that, it still consumes 34 percent of the group’s capital.

Vague and Unclear

That is a calculation that no longer makes any sense. In July, Credit Suisse’s new management under CEO Ulrich Koerner said it was a clear possibility that the investment banking business could be trimmed even further. Körner wants to create a less capital-intensive, advisory-focused business that supports the core wealth management business.

That is pretty vague. Since then, the bank has been repeatedly forced to make statements that it will discuss any changes to corporate strategy at the end of October, but not before then.

Rumour Mongering

Still, speculation is rife. And rife as it ever has been. «Reuters» reported talks between Credit Suisse and investors about another multi-billion-dollar capital increase. Others are speculating whether it is considering exiting the US investment banking market entirely.

Credit Suisse denied the latter to «Credit Suisse is not exiting the US market. Any reporting that suggests otherwise is categorically false and completely unfounded,» a spokesperson indicated.

Splitting Up

The «Financial Times» (paywall) came up with a very detailed picture of what the investment banking business could look like come November. A slimmed-down, traditional advisory ready for a spin-off.

At the same time, loss-making or overly risky assets would be hived off into a «Bad Bank». Piecemeal solutions would be found for the remaining parts of the business.

Window Dressing

All this sounds like typical window dressing for a business about to be sold off. The good is being separated from the bad, making it easier to divest.

It gives management more leeway in selling particular areas or businesses, regardless of whether they are listing the units or negotiating with competitors.

Deutsche Bank

In July, Koerner indicated he was looking for a solution to the securitized products group business, a lucrative but risk-laden business valued at about $2.5 billion dollars. Analysts at Deutsche Bank, who published an oft-cited study of Credit Suisse in August, stated it has to go much farther than that.

They reckon with a full exit from fixed income and a total restructuring of the credit and institutional lending franchises.

Lacking Funds

The sale of the securitized products business and further risk mitigation could stem the bank’s financial gaps. But it needs up to $4 billion for its planned restructuring and wealth management growth plans.

Divvying up the investment bank seems to be a far easier choice than asking shareholders for more capital. In May, rumors about an impending capital increase scared off investors. And just this past Thursday, Credit Suisse shares fell to an all-time low. That just means that more new shares will have to be issued to get to the required sum, diluting its present shareholders even more. Given the bank’s market capitalization is currently at about $13 billion dollars, $4 billion is a very big ask.

Becoming Pawns

That makes the once powerful Credit Suisse bankers into little more than pawns. They have to be sacrificed to save the group. 

The bank already reflects that. It is no longer run by investment bankers such as Brady Dougan and Thomas Gottstein but by Koerner and his new appointees Dixit Joshi and Francesca McDonagh, all tried and true restructuring specialists.

Serious Attempt

«This time, we believe that management is seriously trying to tackle the problems in investment banking,», the Deutsche Bank analyst writes. That prediction could turn out to be true come October.