Thiam Sees Possibility of `Traumatic' Event as Rates Increase

Here Are CEO Tidjane Thiam's Goals for Credit Suisse
  • Credit Suisse has to position itself `quite defensively'
  • Swiss bank last month reported drop in third-quarter profit

Credit Suisse Group AG Chief Executive Officer Tidjane Thiam said he sees the risk of a “traumatic event” in global markets once the current period of low interest rates comes to an end.

“Frankly, it’s quite likely that there will be at the end of all this period a relatively traumatic event,” Thiam, 53, said in an interview with Bloomberg Television on Tuesday in New York. “It’s quite likely that interest rates will rise and there will be impacts in the real economy, the real world, so as a financial-services company, we have to position ourselves quite defensively.”

Speculation about the Federal Reserve’s rate outlook has prompted swings in securities markets as investors assess whether the global economy is strong enough to withstand a U.S. rate increase. Futures markets show that there’s a 66 percent chance the Fed will raise borrowing costs for the first time in nine years on Dec. 16, while European Central Bank President Mario Draghi has all but pledged to boost stimulus to bolster growth across the euro area.

Earlier expectations for a delay until March had to be trimmed after Fed Chair Janet Yellen told U.S. lawmakers that action next month remains a “live possibility,” a case later bolstered by American job gains.

‘Caught Unprepared’

“Every time you see in markets, when you go from a high-rate environment to a low-rate environment or from a low to a high-rate environment, experience shows that a number of people are caught unprepared,” Thiam said. “That is likely to happen again.”

The comments were part of an interview in which Thiam discussed the opportunity for the bank to expand in managing money for wealthy clients across Asia and the strengths of the firm’s securities unit. The CEO last month announced a plan to reorganize Credit Suisse along geographical lines, cut as many as 5,600 jobs and focus more on wealth management while shrinking and splitting up the investment bank.

“Why do we want to be in wealth management? Because the world is getting wealthier,” said Thiam, who replaced Brady Dougan in July. “That’s a huge opportunity.”

The second-largest Swiss bank after UBS Group AG remains “very focused” on emerging markets including China, where “we have been underweight,” Thiam said. Credit Suisse needs the investment bank to help Asian billionaires with illiquid assets who need access to financing, he said.

China Adjustment

“For billionaires it is important to have the investment bank alongside wealth management,” Thiam said. “You need a really good investment bank.”

While investors around the globe have been hurt by an equities rout that wiped $5 trillion from market values amid concerns that China’s economy may cool more than expected, Thiam said that he welcomes “the adjustment of expectations” regarding the nation.

“China is not going to grow 10 percent forever,” he said. “What I like about China is that generally the policy response is correct. I couldn’t say that about the euro zone.”

‘Perfect Storm’

Thiam has already warned investors that 2016 would not be a good year as he restructures the company while he prepares to raise about 6 billion Swiss francs ($6 billion) such as by selling 4.7 billion francs of shares to existing investors.

The world’s largest banks are shrinking their bond-trading activities to comply with stricter capital rules imposed following the financial crisis. As part of a wider restructuring, Credit Suisse said last month that it decided to cut the size of its macro unit, which contains rates and foreign-exchange trading.

“Of course, if rates go well, macro we’ll do very well” but “when the cycle turns, it will turn to losses -- we have to look through the cycle,” Thiam said. The bank remains “very, very good at equities,” he added.

In an interview with CNBC on Tuesday, Andrea Orcel, UBS’s investment bank chief, echoed Thiam’s remarks, saying that the Swiss lender has a “very strong equity business, which we want to keep as strong as it is and hopefully grow it.”

“We’re facing an environment which we view as a perfect storm,” Orcel said. “Regulation is tightening and changing again, that will impact our business model. The market is more uncertain than ever and people don’t really know where it’s going. Competitors are restructuring and repositioning or pushing in different ways.”

Bonus Cuts?

Credit Suisse last month reported a drop in third-quarter profit, missing analyst estimates, in part because of a bigger-than-expected decline in handling clients’ money, the business the company wants to expand. The bank will take a “substantial impairment” charge in the fourth quarter as it writes down goodwill in the investment bank, Chief Financial Officer David Mathers told investors in London.

Still, when asked whether a story published in Schweiz am Sonntag that the bank may cut bonuses by as much as 60 percent is true, Thiam said the “short answer is no” and called it “speculative.”

Thiam, who joined Credit Suisse from U.K. insurer Prudential Plc, also said that “it’s in the long-term interest of Britain to stay” in the European Union, when asked about a referendum, and that he’s “confident” that voters will take the right decision.

Credit Suisse shares have dropped 3.9 percent this year, while UBS is up 15 percent.

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