Will Credit Suisse Get It Right This Time?
The way to get ahead in the global commercial and investment banking business these days is to build a tightly focused, centrally managed organization along the lines of J.P. Morgan, Merrill Lynch, Deutsche Bank, or Morgan Stanley. So it was hardly a surprise when CS Holding, the Zurich-based owner of CS First Boston and Credit Suisse, announced a sweeping restructuring on July 2 aimed at consolidating control of the sprawling banking group under its autocratic chairman, Rainer E. Gut.
Gut has been under pressure from investors to boost performance and make management changes ever since he launched an abortive move to merge with crosstown rival Union Bank of Switzerland this spring. So he has changed the name of his organization to Credit Suisse Group. He has named a new chief executive--Lukas Muhlemann, currently CEO of insurer Swiss Re. He is planning large cuts in his retail banking network in Switzerland. And he is forcing out his current second-in-command, Josef Ackermann, now president of Credit Suisse, who industry sources say had moved too slowly with restructuring. "[Ackermann] wasn't able to make the hard decisions that had to be taken if you want to reach a high return on equity," says UBS Chief Economist Peter Buomberger. "And with Rainer Gut, either you go along with him or you leave."
HEAVYWEIGHTS. The moves are intended to make both Credit Suisse and First Boston, with a combined $330 billion in assets, more competitive by integrating their huge investment banking, commercial lending, and fund management operations. Such centralization--plus a strong management hierarchy--have proved successful among the Wall Street heavyweights that Europe's major banks are increasingly trying to emulate. The changes will also eliminate a lot of back-office duplication and strengthen the Credit Suisse brand. Those two words now will appear before the name of every division. Under the holding company, there previously were a dozen or more company names.
Investors gave the announcement their seal of approval, pushing CS Holding's shares up by nearly 11% on July 2. They are clearly betting that Muhlemann, renowned for his turnaround of Swiss Re, can work similar magic at Credit Suisse, whose return on equity of about 8.5% compares with double digits at most other major European banks. But Credit Suisse won't see any savings immediately. It will take until the end of 1998 for the restructuring to be complete.
Meanwhile, Gut is taking firmer control of CS First Boston, which has been rocked in recent months by a wave of defections. Senior traders and managers dissatisfied with their bonuses have been lured away by lucrative packages from the fast-growing investment banking units of UBS and Deutsche Bank. John M. Hennessy, CS First Boston's longtime chairman, will step down, and the investment bank will now be run by two veteran CS Holding managers--Hans-Ulrich Dorig and Hans Geiger, plus Allen D. Wheat, now president, as the new chief operating officer.
Under its new leadership, CS First Boston will assume control of Credit Suisse's international banking business as well as the lucrative derivatives group, CS Financial Products. "We need to have a more rational use of our capital," says Dorig, the new CS First Boston CEO, who points to J.P. Morgan & Co.'s move into investment banking as one of his models for global success.
BITTER COMPLAINTS. To keep shareholders happy while they wait to see if the new investment banking structure delivers the greater value Gut is promising, the chairman is planning to slim down his private banking business and ax 5,000 jobs over the next three years. Some 3,500 of the reductions will come in Switzerland, where Gut had done little to reduce redundant retail branches after buying two smaller competitors in recent years. Bank insiders had complained bitterly that instead of fostering more efficiencies, the takeovers of Bank Leu and Swiss Volksbank had resulted in the subsidiaries' competing directly with their parent in retail and even investment banking and trading. "They were catering to clients they shouldn't have," concedes Dorig.
Two of the bank's biggest competitors--UBS and Swiss Bank Corp.--have already reorganized themselves this year. All three aim to centralize control and offer customers a simpler array of products and services. Sniffs UBS economist Buomberger: "They're doing what we're already doing, what Deutsche is doing, what J.P. Morgan is doing." But Credit Suisse had little alternative. In a business where size is becoming ever more important in building market share, managing financial might is a more pressing challenge than ever.