Monday, 28 November 2022

Credit Suisse unveils restructure plan after $4 billion Q3 2022 loss

5 min read

Credit Suisse reports net revenues of CHF 3.8 billion ($3.8 billion) and pre-tax loss of CHF 342 million ($342 million) along with a CET1 ratio of 12.6% in 3Q22

"The third quarter, and more broadly 2022 so far, have been significantly impacted by the continued challenging market and macroeconomic conditions, leading to a weaker performance for our Investment Bank in particular. Our recent group level performance has been disappointing for our stakeholders. From today, we are taking a series of decisive actions to re-focus Credit Suisse around the needs of our clients and stakeholders. Our new, integrated model will be focused on Wealth Management, the Swiss Bank, as well as Asset Management, and we will radically restructure the Investment Bank, strengthen capital, and accelerate our cost transformation. We believe these actions will lead Credit Suisse to more stable performance and generate lasting value for our shareholders," said Ulrich Körner, Chief Executive Officer of Credit Suisse Group AG

Summary of 3Q22 performance

Credit Suisse's performance in the third quarter of 2022 continued to be challenged by the current economic and market environment. The combination of the geopolitical situation as well as the significant monetary tightening by major central banks worldwide in response to the continued and significant increase in inflation have resulted in continued heightened market volatility, weak customer flows and ongoing client deleveraging.

The performance in the Investment Bank (IB) was weak, impacted by extremely challenging market conditions driven by higher volatility, widened credit spreads and muted primary issuance. As a result, our areas of core strength across trading as well as Investment Banking & Capital Markets were affected by the significant slowdown in capital markets activity and the cumulative impact of our de-risking. Our performance in Wealth Management (WM) was challenged due to lower client activity, AuM and recurring revenues. However, WM benefited from the improved rates environment leading to higher net interest income. Swiss Bank's (SB) performance was resilient notwithstanding the adverse impact of the recent change in interest rates by the Swiss National Bank (SNB). Asset Management's (AM) performance year on year was adversely impacted by continued market uncertainty.

The Corporate Center's performance in 3Q22 improved year on year with adjusted* net revenues up due to improved revenue performance in Treasury as well as lower legacy expenses in the Asset Resolution Unit. Adjusted* operating expenses were also down 62% year on year leading to a smaller adjusted* pre-tax loss for 3Q22 of CHF 41 million ($41 million), compared to CHF 212 million ($212 million) in 3Q21.

In 3Q22, we saw net revenues decrease by 30% year on year, driven by a decline in IB net revenues, down 58%, on a USD basis; a decline in WM net revenues, down 18%; as well as a decline in SB net revenues, down 9%. We had a net revenue increase in AM, up 15% year on year. We had adjusted* net revenues of CHF 3.8 bn, down 31% year on year, driven by lower Equity Capital Markets and Leveraged Finance activity, as well as mark-to-market losses of $120 million, in the IB and subdued client activity in WM.

Reported operating expenses of CHF 4.1 billion ($4.1 billion) were down 10% year on year and included major litigation provisions of CHF 178 mn1. Our adjusted* operating expenses of CHF 3.9 billion (3.9 billion) were down 6%, driven by lower compensation and benefits, down CHF 398 mn and reflecting the revenue decline, partly offset by an impairment of CHF 145 million ($145 million) relating to IT-related assets in WM.

We reported a pre-tax loss of CHF 342 million ($342 million) compared to pre-tax income of CHF 1 billion ($1 billion) in 3Q21; this included CHF 178 million ($178 million) of major litigation provisions, primarily relating to legacy cases. We continue to take a proactive approach to reducing our litigation docket, including through the settlements of legacy cases, such as the French cross border matter and the New Jersey Attorney General RMBS case, for which we were fully provisioned. Our adjusted* pre-tax loss for 3Q22 was CHF 92 million ($92 million), down compared to adjusted* pre-tax income of CHF 1.4 billion ($1.4 billion) in 3Q21.

We reported a net loss attributable to shareholders of CHF 4 billion ($4 billion), compared to net income attributable to shareholders of CHF 434 million ($434 million) in 3Q21. Our reported net loss attributable to shareholders included an impairment of deferred tax assets related to our strategic review of CHF 3.7 billion ($3.7 billion).

The challenging market conditions in 3Q22 were the main driver of the decline in Group Aum which stood at CHF 1.4 trillion ($1.4 trillion) down CHF 53 billion ($53 billion) from CHF 1.45 trillion ($1.45 trillion) at the end of 2Q22. This included group net asset outflows of CHF 12.9 billion ($12.9 billion) in 3Q22, compared to NNA of CHF 5.6 billion (5.6 billion) in 3Q21.

Our CET1 capital ratio was 12.6% as of the end of 3Q22, down 90 basis points quarter on quarter, mainly driven by the impact of the impairment of deferred tax assets related to our strategic review, as well as by risk-weighted assets inflation and the Group pre-tax loss. Credit Suisse Group AG announced its intention to raise capital with gross proceeds of CHF ~4.0 bn, subject to approval at a forthcoming Extraordinary General Meeting on November 23, 2022, which should support an increase in the 3Q22 CET1 ratio from 12.6% to a pro-forma CET1 ratio of ~14.0%. Our Tier 1 leverage ratio and our CET1 leverage ratio remained broadly flat at 6.0% and 4.1%, respectively, as of the end of 3Q22. Our Liquidity Coverage Ratio (LCR) in 3Q22 was 192%2, this compares to an LCR of 191% in 2Q22.

 

 

Credit Suisse unveils new strategy and transformation plan

Credit Suisse Group AG (Credit Suisse)  announces a series of decisive actions to create a simpler, more focused and more stable bank built around client needs. The announcement follows a strategic review conducted by the Board of Directors and Executive Board, resulting in a radical restructuring of the Investment Bank, an accelerated cost transformation, and strengthened and reallocated capital, all of which are designed to create a new Credit Suisse.

Credit Suisse is taking extensive measures to deliver a new, more integrated business model, with the goal of creating value for shareholders. The bank will build on its leading Wealth Management and Swiss Bank franchises, with strong product capabilites in Asset Management and Markets.

Over the next three years, Credit Suisse expects to radically restructure the Investment Bank to significantly reduce Risk Weighted Assets (RWAs) with:

  • - A highly connected Markets business and industry-leading Investor Products franchise
  • CS First Boston as an independent Capital Markets and Advisory bank
  • Capital release from exits and significant exposure reduction for Securitized Products 
  • Reduced RWAs and Leverage Exposure, each expected to decrease by ~40%
  • Accelerate cost reductions
Reducing the Group's cost base by 15%, or CHF ~2.5 billion, to CHF ~14.5 billion in 2025
  • Progress on framework and exclusivity agreement announced today to transfer a significant portion of the Securitized Products Group (SPG) to investor group led by Apollo Global Management
  • Strengthen the CET1 ratio through Securitized Products transaction and other divestments
  • Create a Non-Core Unit (NCU) to accelerate the run-down of non-strategic,low-return businesses and markets, to release capital
  • Allocate almost 80%1 of capital to Wealth Management, Swiss Bank, Asset Management and Markets by 2025

The bank is targeting a Group CET ratio pre-Basel III reform of at least 13% throughout the transformation, and a Group CET1 ratio pre-Basel III reform of more than 13.5% by the end of 2025. Credit Suisse has today announced its intention to raise capital with gross proceeds of CHF ~4 billion through the issuance of new shares to qualified investors, including Saudi National Bank, which has committed to invest up to CHF 1.5 billion to achieve a shareholding of up to 9.9%, and through a rights offering for existing shareholders, subject to approval at the Extraordinary General Meeting (EGM) on November 23, 2022. These measures are expected to translate into a diversification of the bank's shareholder base and increase the Group CET1 ratio from 12.6% at 3Q22 to a pro forma ~14% ratio. The bank estimates restructuring charges, software and real estate impairments in connection with the transformation of CHF 2.9 billion over a period from 4Q22 to 2024. The transformation is intended to be funded through divestments, exits, today's announced capital actions and existing resources.

Axel P. Lehmann, Chairman of the Board of Directors of Credit Suisse, said: "Over 166 years, Credit Suisse has built a powerful and respected franchise but we recognize that in recent years we have become unfocused. For a number of months, the Board of Directors along with the Executive Board has been assessing our future direction and, in doing so, we believe we have left no stone unturned. Today we are announcing the result of that process - a radical strategy and a clear execution plan to create a stronger, more resilient and more efficient bank with a firm foundation, focused on our clients and their needs. At the same time, we will remain absolutely focused on driving our cultural transformation, while working on further improving our risk management and control processes across the entire bank. I am convinced that this is the blueprint for success, helping rebuild trust and pride in the new Credit Suisse while realizing value and creating sustainable returns for our shareholders."

Ulrich Körner, Chief Executive Officer of Credit Suisse, said: "This is a historic moment for Credit Suisse. We are radically restructuring the Investment Bank to help create a new bank that is simpler, more stable and with a more focused business model built around client needs. Our new integrated model, with our Wealth Management franchise, strong Swiss Bank and capabilities in Asset Management at its core, is designed to allow us to deliver a unique and compelling proposition for clients and colleagues while targeting organic growth and capital generation for shareholders. The new Executive Board is focused on restoring trust through the relentless and accountable delivery of our new strategy, where risk management remains at the very core of everything we do."

Restructuring the Investment Bank

Credit Suisse intends to take decisive steps to restructure the Investment Bank and focus on areas more closely connected to its core businesses where it has a competitive advantage. This will involve transforming the risk profile of the Investment Bank and targeting a reduction in RWAs of ~40% by 2025 through strategic actions across four areas:

The Markets business will include the strongest and most relevant aspects of the new Credit Suisse's trading capabilities. While remaining fully committed to serving institutional clients, its leading capabilities in cross-asset investor products as well as equities, FX and rates access will be closely aligned with the Wealth Management and Swiss Bank franchises. This will allow Credit Suisse to provide tailored solutions to clients and differentiate itself from other pure-play wealth managers. These changes are also expected to enable Markets to reinforce its position as a solutions provider to third party wealth managers. Markets will also support the newly created CS First Boston.

The Investment Bank's capital markets and advisory activities will - following a transition period - lead to the creation of CS First Boston, a firm with a partnership culture that we believe will be competitive and attractive to anchor investors, employees and entrepreneurial clients. Drawing on its rich heritage across advisory and capital markets, CS First Boston is expected to be more global and broader than boutiques, but more focused than bulge bracket players. The future CS First Boston envisions attracting third-party capital, as well as a preferred long- term partnership with the new Credit Suisse.

Capital Release Unit (CRU) will be created and comprise a NCU and the Group's Securitized Products business. The NCU's purpose is to release capital through the wind-down of non-strategic, low return and higher- risk businesses. The NCU is expected to include the remainder of Prime Services, non-Wealth Management related lending in Emerging Markets, the bank's presence in select countries and select European lending and capital markets activities. The NCU is expected, over time, to release ~60% of RWAs and ~55% of Leverage Exposure by the end of 2025, allowing the bank to allocate more capital to higher-return businesses where it has clear competitive advantages.

Credit Suisse has entered into a framework and exclusivity agreement to transfer a significant portion of its Securitized Products Group (SPG) to an investor group led by Apollo Global Management. Under the terms of the proposed transaction, investment vehicles managed by affiliates of Apollo and PIMCO would acquire the majority of SPG's assets from Credit Suisse and other related financing businesses from Credit Suisse, enter into an investment management agreement to manage the residual assets on Credit Suisse's behalf, hire the SPG team to the new platform and receive certain ongoing services from Credit Suisse in order to maintain a seamless, high-touch experience for clients.

The transaction proposed under the framework agreement is subject to the signing of final binding documentation, which is anticipated during 4Q22. Closing of the proposed transaction would be subject to customary closing conditions and regulatory approvals and would be expected to occur during 1H23.

Key Investment Bank Appointments

Michael Klein will step down from the Board of Directors, which he joined in 2018, to act as advisor to Group CEO Ulrich Körner, helping launch CS First Boston. It is anticipated that he will be appointed CEO designate of CS First Boston, joining in 2023 and pending regulatory approvals. During this transition period, David Miller will continue in his current role as Global Head of Investment Banking & Capital Markets, reporting directly to Group CEO Ulrich Körner, and supporting the establishment of CS First Boston as an independent bank.

In addition, Mike J. Ebert and Ken Pang are appointed co-Heads of the Markets business, effective from November 1, 2022. They will report directly to Group CEO Ulrich Körner. Mike J. Ebert currently serves as Co- Head of the Investment Bank and Co-Head of Global Trading Solutions. Ken Pang currently serves as Co-Head of Global Trading Solutions and Co-Head of the Investment Bank for the Asia Pacific (APAC) region.

Christian Meissner, who has served as CEO of the Investment Bank and member of the Executive Board, has decided to leave the bank, effective immediately.

Louise Kitchen is appointed Head of CRU, effective November 1, 2022. She will report directly to Chief Financial Officer Dixit Joshi. Louise Kitchen most recently served as Head of the Capital Release Group and member of the Group Management Committee at Deutsche Bank. She previously held a number of other roles at the

bank including the Head of Institutional & Treasury Coverage, Head of Strategic Implementation and Head of Commodities Structuring and Sales. Before joining Deutsche Bank in 2005, she worked for UBS Group.

Ulrich Körner, Group CEO of Credit Suisse, said: "I am delighted to congratulate Michael, Mike and Ken on their respective appointments. At the same time, I would like to welcome Louise to Credit Suisse and thank David for his continued support. Michael brings a vision and an esteemed track record and I am thrilled that he has agreed to take this essential position. Michael will play a substantial leadership role for Credit Suisse and in CS First Boston's future. All these appointments bring a wealth of experience to our transformation. They have profound industry knowledge and I look forward to working more closely with all of them. At the same time, I would like to thank Christian for his contribution and wish him all the best for his future endeavours."

Accelerating Cost Transformation

Credit Suisse plans to take significant measures to reduce the Group's cost base by 15%, or CHF ~2.5 billion, delivering a cost base of CHF ~14.5 billion in 2025. Of this, a reduction of CHF ~1.2 billion is targeted for 2023. A comprehensive cost transformation program has been initiated and will go deeper and further than the bank has previously indicated to substantially improve long-term efficiency while retaining a focus on strengthening risk management and investing in Credit Suisse's core businesses. Key cost transformation initiatives include non-core unit rundown and business descoping, organizational simplification, workforce management and third-party cost management.

Credit Suisse has already commenced the implementation of cost reduction activities in the second half of 2022. Measures that are already mandated include a targeted 50% reduction in consultancy spend and a 30% reduction in contractor spend with the benefits expected in 2023. A headcount reduction of 2,700 full-time-equivalent employees (FTE), or 5% of the Group's workforce, is already underway in 4Q22. Credit Suisse expects to run the bank with ~43,000 FTE by the end of 2025 compared to ~52,000 at the end 3Q22, reflecting natural attrition and targeted headcount reductions.

Strengthening and Reallocating Capital

Credit Suisse has today announced its intention to raise capital with gross proceeds of CHF ~4.0 billion through the issuance of new shares to qualified investors and through a rights offering for existing shareholders, subject to approval at the EGM. These capital raises should support an increase in the 3Q22 CET1 ratio from 12.6% to a pro-forma CET1 ratio of ~14.0%. In addition, the successful execution of the Securitized Products exposure reduction and other planned divestments as well as RWA and leverage reductions from the new NCU are expected to release further amounts of capital to support the execution of the strategic transformation. Accordingly, the bank expects to maintain a pre-Basel III reform CET1 ratio of at least 13.0% throughout 2023- 2025 with an expected 2025 pre-Basel III reform CET1 ratio in excess of 13.5%.

Credit Suisse further intends to reallocate capital to its core, higher-return businesses. The share of RWAs in Wealth Management, the Swiss Bank and Asset Management, together with Markets, is estimated to increase to almost 80% by 2025, with the intention of growing the revenue share of these businesses to over 85% by 2025. CS First Boston is estimated to account for a further 9% of RWAs and ~14%8 of the revenue share by 2025.

Group Financial and Capital Targets for 2025

  • Core Return on Tangible Equity (RoTE) of more than 8%; Group RoTE of ~6%
  • Cost base of CHF ~14.5 billion; CHF 15.8 billion in 2023
  • Group CET1 ratio of more than 13.5% pre-Basel III reform; at least 13.0% pre-Basel III reform in 2023- 2025
  • To create value for shareholders through meaningful dividends from 2025 onwards; nominal dividend over 2022-2024

Credit Suisse will follow a clear execution roadmap with the announced restructuring of the Investment Bank, strengthened capital levels, and accelerated cost transformation. The bank is expected to deliver sustainable and attractive returns from 2025 onwards.

Re-disseminated by The Asian Banker

Diary of Activities