The Incredible Shrinking Bank

Credit Suisse’s Tidjane Thiam says he’s shaping a bank that is “high yield” and “extremely safe.” Not everyone agrees.


On a February morning, at 9:00 sharp, a blunt-spoken outsider — a surprise choice for his job, with a mandate to drain a vast organization’s swamp of bloat and inertia — stepped onstage to report on his progress. The newcomer wore a charcoal gray suit and horn-rimmed glasses, and spoke in measured tones. His audience — studious, with many wielding iPads — sat motionless as the speaker switched seamlessly among three languages. The emotional highlight of his speech, if it could be called that, was a vague hint about a planned initial public offering.

In tone, if not in mandate, this man could not have been further from the bombast of a certain Western leader. And he spoke not in Washington but in Zurich — at the annual results presentation of Credit Suisse Group, to be exact. The protagonist was Tidjane Thiam, whose career included jail time following a military coup in his native Côte d’Ivoire and a stint as chief of U.K. insurer Prudential. Like the more-well-known newcomer to the White House, he had little experience in his current role: Thiam, despite an impressive CV, had never worked within the walls of a bank before taking the 159-year-old Swiss institution’s reins in June 2015.

The new CEO had taken swift action. Credit Suisse slashed costs by some 9 percent, or Sf1.9 billion ($1.9 billion), during 2016, on the back of a “rightsizing” that eliminated 7,250 jobs, mostly in its investment banking operations. It shrank its “strategic resolution unit” — a sort of internal bad bank, where Thiam bundled mountains of high-risk obligations from the days of swashbuckling derivatives trading — by 39 percent, to $44 billion. Wealth management, the traditional knitting that Thiam is aiming to get back to, grew nicely, with double-digit net asset growth in the key Asian and Middle Eastern regions.

The year also saw its share of penitence: Thiam closed out a $5.3 billion settlement with the U.S. Department of Justice over the mis-sale of mortgage-backed securities from 2005 to 2007, including a $2.5 billion fine and $2.8 billion in “relief to underwater homeowners, distressed borrowers and affected communities.” Credit Suisse paid a further $90 million to the U.S. Securities and Exchange Commission for misrepresenting new assets in wealth management. Even after these charges, the CEO reported an increase in the bank’s CET1 capital ratio — the closely watched relationship between equity and risk-weighted assets — to 11.6 percent from 10.2 percent, and hinted he might shelve a plan to tap markets for billions more through selling shares in a newly created Swiss banking subsidiary. “Some investors are very interested because they see a bank with high yield, extremely safe, like the Nordic banks,” Thiam told CNBC after sharing the numbers onstage in Zurich.

Indeed, Thiam’s emergency surgery — with a promise of further incisions this year and next — helped Credit Suisse’s stock bounce back from its lowest point in decades. Shares climbed 31 percent in the six months ended February 20, beating a 28 percent rise in an iShares exchange-traded fund that tracks the STOXX 600 European banking index.

Yet the recent rise in stock price masks an ugly truth: At $15.27 on February 22, shares are trading at barely half their price when Thiam took over.

Analysts still see an uphill climb to create the “high-yield, extremely safe” institution Thiam wants to be running, one that going forward will rely on stable revenue from the world’s superrich rather than on gyrating earnings from the trading floor — that is, something like what Credit Suisse was before it dug into its Zurich vaults to buy swaggering Wall Street house First Boston nearly three decades ago. “I don’t see them structurally in a position to reach the double-digit returns needed for upside,” says Andreas Venditti, head of banking research at Zurich neighbor Bank Vontobel; he has a hold rating on Credit Suisse. “Mr. Thiam may find it easier to change strategy than DNA in an organization of 50,000 people.”

Credit Suisse’s travails and rescue effort may be particularly dramatic, but they are emblematic of a world where the investment banking tide has gone out and investors can see who is swimming naked — most clearly in Europe. Anemic global growth since the 2008 crisis, interest rate curves devastated by quantitative easing, and, above all, postcrisis regulation have tamped down the profits that had become expected for a generation of bankers. Leverage was the lifeblood of investment banking during the pre-2008 golden age, and governments have cut it more or less in half through capital requirements or direct trading restrictions, says Fred Copper, who manages Columbia Threadneedle Investments’ $751 million Overseas Value Fund out of Boston. In Credit Suisse’s case, that has meant a cut from 30 to 15 times assets-to-equity. “The collapse in net interest margins may be cyclical, but the leverage ratio is not,” Copper says. “Each bank has been about cut in half.”

Veteran U.S. investment banks have weathered this storm with relative success, helped by buoyant local markets and regulators that pushed them to write down precrisis losses quickly. The great financial houses of Europe are a different story. Almost to a firm, they have retreated, in one way or another, from their ambitions to challenge Wall Street in the global bulge bracket: Credit Suisse, its crosstown rival UBS, Deutsche Bank, and Barclays, among others, tried to expand cozy traditional businesses into a leverage-fueled worldwide presence following the Reagan-Thatcher-Deng financial explosion of the past century. Now they are heading — painfully — back.

Credit Suisse resisted the downshift longer than most under Thiam’s predecessor, Brady Dougan, an American who started out as a derivatives trader and rose through the securities business. “What UBS did in 2012 and 2013, Credit Suisse decided to do in 2015 and 2016 — and without enough capital,” says Chirantan Barua, an analyst covering Swiss and U.K. banks from Bernstein’s London office. His rating on Credit Suisse: underperform.

Ironically, the executive captaining Credit Suisse’s retreat from global markets is a walking advertisement for globalization’s possibilities. Born two years after Côte d’Ivoire’s independence from France, Thiam, now 54, grew up among the young nation’s elite. His mother was a niece of the long-serving first president, Félix Houphouët-Boigny, and his father served in cabinet positions for ten years.

In 1982 young Tidjane became the first Ivorian to successfully pass the entrance examination for Paris’s elite Ecole Polytechnique. After graduation he earned a degree from Ecole des mines de Paris and an MBA from INSEAD, then spent a half dozen years at superconsultant McKinsey & Co., alternating between posts in Paris and New York. When Houphouët-Boigny at last yielded power, for reasons of death, in 1993, his successor, Henri Konan Bédié, invited Thiam back home to serve as chief economic adviser and head of privatization. Thiam’s outstanding achievement in this post was attracting investors to Côte d’Ivoire’s power sector, which two decades later remains a literal beacon, keeping lights on at home and across West Africa.

Thiam the privatizer rapidly appeared on the radar of the panjandrums at the World Economic Forum, who in 1999 named him to a fictitious global “dream cabinet.” The Ivorian military took a different view, however, and deposed Bédié in December of that year. Thiam flew home during the coup despite the risks, was briefly clamped in jail, then was released to resume his career at McKinsey.

In 2002 he left consulting for London-based insurer Aviva, climbing the ladder to CEO for Europe, then in 2007 jumped to Prudential as CFO. Thiam got Pru’s top job in March 2009, the nadir of the global financial crisis, and shattered a glass ceiling in the process as the first African to head a FTSE 100 company.

Thiam’s first big initiative at Prudential was strategically brilliant but botched in its execution. In March 2010 he agreed to buy AIA Group, the Asian unit of bankrupt U.S. insurance giant American International Group, for £23 billion ($35.5 billion). That would have been a bargain given AIA’s subsequent rebound. But Pru’s shareholders, required to foot a £14.5 billion cash call for the acquisition, revolted, forcing Thiam to slash his bid to $30.38 billion. AIA rejected the markdown, leaving Prudential with a £450 million loss for a breakup fee and related costs, and a public chorus in Britain calling for the CEO’s head. The Financial Services Authority took the rare step of censuring Thiam personally three years later for keeping the regulator in the dark during the AIA negotiations.

Yet Thiam rallied. He pressed into Asia by subtler means with bolt-on acquisitions in Thailand and Malaysia, and organic investments that turned the region into Prudential’s most important. The company’s stock rose more than fivefold during his six years at the helm.

As Tidjane Thiam was building his CV elsewhere, seeds of trouble were being planted at Credit Suisse. Founded in 1856 to finance Swiss railroads, the bank cemented a reputation over the next 130 years as a pillar of steadiness. Then in 1988 it plunged into one of world finance’s more ambitious cross-cultural marriages, buying 44 percent of First Boston Corp., where legendary M&A chiefs Bruce Wasserstein and Joseph Perella had defined the art of the leveraged buyout and hostile takeover. Credit Suisse consummated the relationship by taking a majority stake in 1990.

Swiss bosses may have grumbled about louche Americans turning up late for 9:00 a.m. meetings when no one back home would dream of coming to the office after 8:00, but Wall Street and the City of London seized control of the mother ship. Lacking a significant commercial banking franchise outside tiny Switzerland, Credit Suisse relied more heavily on investment banking and trading than did peers like Deutsche and Barclays, and its traders gravitated toward the sharp end of risky instruments in fixed income, currencies, and commodities. “If you bring everything that is investment banking into the picture, it’s still above 40 percent of the business, compared to a much lower level at most other European banks,” Vontobel’s Venditti says.

That spelled outperformance when markets were hot — and calamity when they were not. Credit Suisse shares tripled between 2003 and 2007, and lost all those gains by the end of 2008. They nearly doubled again in 2009, then began a long secular decline mitigated by a bounce in the optimistic year of 2013. “This has always been a very high-beta stock linked to the macro environment,” Bernstein’s Barua says. “Investors don’t like the volatility.”

Enter Thiam. His cure for the volatility curse, enshrined in an October 2015 strategy statement, boiled down to two basic prescriptions. First, put the Credit Suisse dog, wealth management, back in charge of the First Boston tail, gambling on markets. Second, take a page from the Prudential playbook and go all-in on Asia. The first sentence of the accompanying press release fused these two objectives: “Credit Suisse [will] grow profits and capital generation by serving the large and growing segment of wealthy entrepreneurs in emerging markets.” What was left of the investment bank would “focus on its superior capabilities that best support wealth management client needs.”

Thiam looked to make a virtue of necessity by nurturing a new “Swiss universal bank” — required by national regulators to ring-fence Credit Suisse’s domestic operations — into ballast for the far-flung global group. The Swiss bank was supposed to do double duty as an ace in the hole if headquarters ran short of capital.

But before Thiam could address these grand objectives, he needed to raise lots of money in a rotten market. He managed to shore up Credit Suisse’s capital base by Sf6 billion through a rights issue and private placement, but it cost him a fragile honeymoon with investors: The bank’s shares dropped 37 percent in the four months following the October 21, 2015, strategy announcement; the broader sector lost a mere 23 percent.

Capital adequacy continues to be a question mark for Credit Suisse and a point of public contention with one of its biggest investors: David Herro, the celebrated chief investment officer of Chicago-based hedge fund Harris Associates, which owns 5.2 percent of the bank’s common equity. Harris repeatedly has told financial reporters that he sees no need for additional cash, which would further dilute existing shareholders, while Thiam is sticking by the “optionality” of raising as much as Sf4 billion more by floating a chunk of the Swiss unit in 2017. “I actually welcome this debate,” the CEO said diplomatically after his February earnings announcement. Herro declined to comment for this article.

The Swiss National Bank sounded a very different note last June, warning that both Credit Suisse and UBS would likely need Sf10 billion more in capital to meet looming new prudential requirements — though the regulator added the banks could likely tap the funds through contingent convertible bonds rather than equity emissions.

Thiam the outsider has struggled to get his arms around his massive new organization, analysts say. He shook up Credit Suisse top management after the 2015 strategy declaration, axing four of 12 executive board members and naming six new ones, including top Prudential and Aviva lieutenant Pierre-Olivier Bouée as chief operating officer. Thiam is on his second new head of the global markets division, the center of the personnel carnage. Despite, or because of, these new hires, the bank set overly optimistic performance targets for several quarters running, and it has paid dearly for missing them, says Bernstein’s Barua. “Thiam launched with a bunch of targets that were just ridiculous, dramatically off, and the market got more and more cynical,” he notes.

Despite these hiccups, Thiam is starting to deliver broadly on what he promised, and more than what he promised on the cost side, where the bloodletting drained Sf500 million above targets last year. He is also catching a break from events beyond his control: European bank shares have been on a tear since July, driven first by the (vague) promise of interest rate normalization and later by the “Trump trade” — hope that the new U.S. president will boost corporate profits and juice growth, with a corresponding rise in rates. Thiam found himself in the incongruous position of talking up his global markets unit’s performance at Credit Suisse’s February earnings announcement after savaging the division with pink slips, but he reveled in the tailwind anyway. “Frankly, the pendulum has swung,” he told Bloomberg television after presenting results. “Market sentiment is better now for banks.”

But Thiam’s efforts have, at best, brought Credit Suisse to the starting line of a marathon slog to “high yield, extremely safe,” bank watchers say. “The turnaround is in its very early stages,” says George Karamanos, head of European bank research at Keefe, Bruyette & Woods in London; he has an outperform rating on the stock. “It remains to be seen whether Thiam can execute and whether this strategy is the right one.”

Capital adequacy will be Credit Suisse’s most closely monitored vital sign as long as Thiam keeps markets in suspense about the Swiss unit’s IPO, originally slated for this year. It can be a befuddling indicator. There are myriad ways to measure capital, and the numbers are hard to compare across jurisdictions given different regulatory regimes. Analyst consensus is that Credit Suisse is adequately capitalized for the moment, but could fall off the wagon with another market downturn or the acceleration of Swiss authorities’ push toward the standards known as Basel IV. “If we look at the situation today, they are fine,” Vontobel’s Venditti says. “But there is considerable uncertainty, particularly on how regulation will change.”

Measuring wealth management performance is more straightforward. But reshaping investment banking to service rich clients remains a vague goal, and the bank’s guidance on this is no more than generic. “We can provide our clients with expert investment advice and solutions, and at the same time cater for the needs of their entrepreneurial endeavors,” a Credit Suisse spokesman says. The growth in the number of Asian millionaires to service also looks less like a sure thing than it was during Thiam’s Prudential years. Among other factors, Asian wealth accumulation is threatened by tapering regional growth, Chinese capital controls, and Trump’s threatened U.S. import tariffs. “Credit Suisse brought in Tidjane to turn themselves into an Asian growth stock, but they did it when Asia may be stalling,” analyst Barua says.

Columbia Threadneedle’s Copper is skeptical that Credit Suisse or any other systemically important bank has found the path back to its former glory in the age of diminished possibility. Regulators are indeed determined, explicitly or implicitly, to keep these giants from failing, but the price is safety measures that crimp profits permanently. So uncertain are investors of where regulation will head next that the once-anomalous situation of banks trading below book value has become commonplace: Credit Suisse is currently priced at slightly under 0.8 times book; Citigroup is at 0.9. “Trading below book value is unsustainable in the long term,” Copper says. “But will we ever get back to the 2 times book valuations we saw precrisis? My answer is no.”

He draws an analogy to the airline industry, which floundered for a generation after its own paradigm shift, driven by deregulation and higher fuel prices. “Not long ago the airlines were hemorrhaging money,” Copper says. “Then all of a sudden they figured out how to make money with ancillary revenue streams. Banking needs to figure out the equivalent of a baggage fee.”

From West African power grids to Asian insurance and asset management, Tidjane Thiam has been able to find the equivalent of the baggage fee. Whether he can do so with banking — and in the process transform Credit Suisse — will be far more challenging.