Credit Suisse CEO, Blindsided by Risk Buildup, Cuts Jobs

Credit Suisse CEO: There Needs to Be a Cultural Change
  • Thiam says trading actions were `completely unacceptable'
  • Bank announced additional 2,000 job cuts at securities unit

Credit Suisse Group AG Chief Executive Officer Tidjane Thiam, who said he was blindsided by a buildup of illiquid trading positions that will probably spark a first-quarter loss, pledged to make deeper cost cuts.

The global markets unit, which houses securities trading, will lose money in the quarter as revenue drops as much as 45 percent from a year earlier, Credit Suisse said on Wednesday. Holdings of distressed debts, leveraged loans and securitized products triggered $258 million of writedowns in the period, with the CEO saying some of the positions were built up without his knowledge.

Tidjane Thiam speaking on March 23.
Tidjane Thiam speaking on March 23.
Photographer: Simon Dawson/Bloomberg

“For him to say he was surprised by the size of the position is clearly not good,” said Laurent Frings, who helps oversee about $428 billion as co-head of European credit research at Aberdeen Asset Management Plc in London. “It highlights, at best, historic control failures and is not good for confidence.”

Since taking over in July, Thiam, 53, has pledged to focus on wealth management while shrinking the riskier securities businesses, which helped contribute to the bank’s biggest loss in seven years in the fourth quarter. The Swiss bank has sold off a quarter of its distressed holdings and more than half of its positions in collateralized loan obligations, with the CEO saying he’s been seeking to limit the damage since discovering the full extent in January.

‘Cultural Change’

“This wasn’t clear to me, it wasn’t clear to my CFO and to many people inside the bank,” when the firm presented a strategy update in October, Thiam said in a Bloomberg Television interview with Francine Lacqua, commenting on distressed debt holdings. “There needs to be a cultural change, because it’s completely unacceptable,” adding that there had been “consequences” for some employees. There won’t be any more dismissals stemming from the issue, he said later on Wednesday.

In October, Thiam defended the bank’s credit and securitized products units that he said are viewed negatively as “ugly ducklings” because they require so much capital under new rules introduced since the financial crisis. The CEO said at the time that shrinking the businesses could create more problems and that he didn’t mind allocating capital to the units if they generate acceptable returns, as they did in 2014.

Thiam said at a conference in Zurich later on Wednesday that the positions that caused the writedowns were already in place when he joined, having been built up over the years from 2012 to 2015 after an initial reduction. No traders breached limits, though with "hindsight" the limits may have been too high and traders’ judgment was questionable, he said.

The new CEO has failed to convince investors with the new strategy, with the the company losing about 40 percent of its market value since his October overhaul was announced. The shares dropped to the lowest since 1989 last month and are down 33 percent this year.

Under Thiam’s second restructuring plan, the bank is seeking to cut risk-weighted assets in the global markets business by another 20 percent to about $60 billion this year. Credit Suisse also announced 2,000 additional job cuts at the unit, bringing the total headcount reduction across the bank to 6,000 this year.

The investment banking and capital markets business, which houses advisory services, also posted a loss in the first quarter, according to Thiam.

“We’re cutting deeper, there will be more restructuring costs,” Thiam said in the Bloomberg interview. “The divisions, before restructuring are profitable -- Asia, Switzerland, International -- a small loss in IBCM and a big loss in global markets. Once you take the restructuring charges, you fall into losses. That’s structural and due to investments we’re making right now.”

Credit Suisse expects restructuring costs to peak at 1 billion francs this year, before dropping to 600 million in 2017. The bank is targeting net cost savings of at least 3 billion francs by 2018, up from 2 billion francs, while costs at global markets, led by Tim O’Hara, will be cut to 5.4 billion francs from 6.6 billion francs at the end of last year.

Some of Europe’s largest banks have cut their trading businesses as regulators step up scrutiny of riskier activities while a slump in energy costs and cooling emerging-market growth eroded revenue. At Deutsche Bank AG, co-CEO John Cryan said earlier this month that he doesn’t expect to post a profit this year as he eliminates thousands of jobs and sells assets as part of an overhaul. Barclays Plc has also scaled back its securities unit.

‘Fighting Back’

This is Thiam “fighting back and saying we actually have to do more,” Chris Wheeler, a London-based analyst at Atlantic Equities, said in an interview with Manus Cranny on Bloomberg Television on Wednesday. “It’s part of the strategy trying to say to the markets, ‘we are really very serious about this.’”

Bonuses at global markets were cut by about 35 percent in 2015, according to slides on Wednesday. Thiam said on a conference call that he asked for a 40 percent cut in his variable pay. The lender will publish compensation details on Thursday.

"This accelerated restructuring move comes at the right time and should be positively received as it addresses some key criticism from shareholders that the investment bank still is too big," said Andreas Venditti, an analyst at Vontobel, who has a hold rating on the stock. He said the first quarter performance at the securities unit has been "dismal.”

The bank’s International Wealth Management unit has delivered “resilient” revenue this year within private banking, led by “strong” net interest income and net new asset inflows of 7.1 billion francs year to date. The Swiss Universal bank, earmarked for a partial initial public offering in 2017, has also “performed well” this year, with “resilient pretax income performance” expected in the fist quarter, the lender said.

The CEO said the bank has taken steps to avoid any more surprises in its trading business.

“I’m confident that we have good processes in place to try and ensure that this never happens again,” Thiam said in the interview. “I can never say never.”

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