Credit Suisse Drops Investment Bank Targets to Reduce Riskby , , and
Investment bank to support private bank and wealth management
Will provide fewer incentives for bankers to take risky bets
Credit Suisse Group AG, Switzerland’s second-largest lender, won’t be setting profit targets at its shrinking investment bank as it seeks to reduce risk-taking at the unit.
The investment bank is there to “support our ambitions in the private banking and wealth management space,” Chief Executive Officer Tidjane Thiam, 53, told investors meeting on Thursday in Bern to approve the company’s stock sale. The lender is not setting “profit targets to ensure that our bankers do not have incentives to engage in overly risky activities. That is an important aspect of our new strategy.”
Thiam, the former CEO of Prudential Plc who took the top job at Credit Suisse in June, is overhauling the lender’s securities unit in a bid to boost returns for shareholders and meet tougher capital requirements. Under a plan unveiled last month, he is boosting the bank’s focus on Switzerland and expanding in wealth management, especially across Asia, while pulling back from some trading businesses and eliminating as many as 2,000 workers in London.
“There is no view on what sort of return he believes he can achieve at the investment bank and whether it will be above the bank’s cost of capital,” said Christopher Wheeler, an analyst at Atlantic Equities in London “He’s deflecting attention away from this omission by saying it’s not about returns, but supporting the core wealth management business.”
Thiam joins European counterparts at Deutsche Bank AG, Barclays Plc and UBS Group AG in pulling back from selective trading operations as regulators force lenders to increase funds they hold as protection against possible losses. Trading revenues have been under pressure as a slump in commodity prices, global equity rout, prospects of higher borrowing costs and faltering Chinese economy prompted investors to hold back from buying and selling assets.
Credit Suisse investment bank posted a pretax loss of 125 million francs ($122 million) in the three months through September after a profit of 516 million francs a year earlier. That’s the first shortfall since the fourth quarter of 2014. The unit was split in two, with the new divisions run by Tim O’Hara and Jim Amine. The units will focus more on “longer-term fee opportunities” and less on short-term trading activities, Thiam said.
While Credit Suisse was among firms to avoid a taxpayer bailout during the financial crisis, the lender is still dealing with the fallout from its conduct in the U.S. in the years before the crash. The bank, one of the world’s biggest traders of securitized products, faces a wave of litigation from investors and regulators over claims it sold faulty mortgage-backed securities, according to a Nov. 17 report from Moody’s Investors Service. Some of the cases are “high risk” that could result in “substantial costs” and criminal proceedings, the ratings company said.
Thiam, who replaced Brady Dougan, said last month that he won’t provide a profitability target for the bank because only a “fool” would commit to something that can’t be controlled.
“I sense he is trying to break with the post-crisis practice of investment banks setting targets and in doing so may cause some confusion,” Wheeler said. “His approach will be compared negatively with that of” Deutsche Bank co-CEO John Cryan “who has a much bigger job on his hands, but has laid out a clearer road map on how he will improve financial performance and what he hopes to achieve.”
Some of Thiam’s rivals have also avoided profit targets. Lloyd Blankfein, CEO of Goldman Sachs Group Inc., hasn’t publicly set such a goal since the financial crisis. He and fellow top executives cited an unclear regulatory environment in the wake of the crash and later said the New York-based firm wanted to focus more on the long-term.
Barclays last month cut its return-on-equity target for next year to 11 percent from 12 percent, when reporting a drop in third-quarter pretax profit. UBS also pushed back its target for a third time in two years.
Credit Suisse shares have declined about 3.7 percent this year.