Thiam's Luck

Credit Suisse Needs More Trump Bumps

Buoyant markets are cushioning the pain of his overhaul.
At Closing, January 19th
18.28 CHF

Once at risk of becoming the next dead man walking of European banking, Credit Suisse Group AG CEO Tidjane Thiam has won himself some time. How long his reprieve lasts depends on factors outside his control.

As dismal as the 2.35 billion-franc ($2.3 billion) quarterly loss he reported on Tuesday was, Thiam was still able to draw a line under the Swiss bank's involvement in the U.S. mortgage probe without depleting capital by as much as investors had feared.

That’s heartening for shareholders who had fretted about being diluted by a big stock offering. There’s even a chance the bank won't have to sell shares in its prized domestic unit to bolster capital. That all helped to send the shares up by as much as 3 percent.

Roller Coaster

Credit Suisse shares have clawed back their losses over the past year

Source: Bloomberg

There’s still much work to do. Credit Suisse has as many as 6,500 more jobs to cut this year, an estimated 5 billion Swiss-franc capital gap to fill, and 14 billion francs of unwanted assets to offload by 2019. Meanwhile, return on equity is stubbornly anemic.

Profitability Problem

Credit Suisse CEO Tidjane Thiam is struggling to revive the Swiss bank's return on equity

Source: Company filings

2017 has got, though, off to a bright start for bankers: markets are hitting highs and the U.S., under President Donald Trump, is preparing to roll back regulations intended to make customers safer.

The “pendulum has swung,” Thiam said in a Bloomberg Television interview. It will need to keep swinging if he is to offset the cost of overhauling Credit Suisse and deliver the reliable profits shareholders want.

Missing Out

Credit Suisse's investment banking revenue growth trailed almost all the firm's peers

Source: Bernstein analysis, company reports

Percentage growth is compared with the year-earlier period

Volatility in fixed-income markets, together with growing expectations of increases in U.S. interest rates, did wonders for Credit Suisse’s traders and investment bankers in the fourth quarter. FICC revenue climbed 14 percent and investment banking income 19 percent, even if equities fell, according to Bernstein estimates. January looks to have been strong, too, with the bank reporting a doubling of sales in some credit products.

But that’s no guarantee of a strong year to come. Early 2017 may turn out to have been a convenient window of opportunity for clients and companies before the elections in the Netherlands, France and Germany and expected U.S. rate rises.

Wealth management is still feeling the pinch from tougher rules on tax transparency, client risk aversion and low rates. Combined outflows of the bank’s wealth management divisions totaled 2.4 billion Swiss francs, according to JPMorgan estimates.

Credit Suisse says January was strong, and margins are already improving -- but this is a business that also relies on risk appetite and positive market sentiment to thrive. Competitive threats from low-cost passive products aren't going away either.

Another part of Credit Suisse that needs market sentiment to stay positive is its so-called bad bank. Impressively, the operation cut assets by almost half in 2016. Benign markets and higher interest rates will limit losses from further sales, according to HSBC.

Thiam needs a lot to keep going right before he can declare his work done. Revenue in 2016 fell to the lowest since the financial crisis and return on equity was negative for a second year in a row. At 11.6 percent, Credit Suisse's capital ratio is still lower than Deutsche Bank AG. The shares still trade at a steep discount to their book value.

Investors will need several more pendulum-swinging quarters before they're willing award the bank a better valuation: Thiam has won a reprieve rather than a pardon.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Lionel Laurent in London at

    To contact the editor responsible for this story:
    Edward Evans at

    Before it's here, it's on the Bloomberg Terminal.