‘Definitive Surgery’: Will Credit Suisse’s gamble pay off?

When Credit Suisse executives planned to spin off their capital markets and advisory businesses over the summer, they chose a name that recalled the glory days of the 1980s. First Boston.

But as the strategy evolved, they soon realized that the brand’s intellectual property was already owned by a series of smaller financial services firms that refused to sell.

Instead, the bank has decided to name CS First Boston the business it plans to list next year as part of the group’s restructuring.

166 years, credit suisse The management team focused on growing the business from humble beginnings financing the Swiss rail network into an international bank providing wealth management and investment banking services to a client base around the world. The 1988 merger with First Boston was part of the Swiss bank’s effort to expand its investment banking operations in the United States.

Thursday morning its extended drive came to a halt with the bank screeching. Unveils a radical new strategy It was intended to stem years of losses alongside the CHF1.5 billion investment by the Saudi National Bank.

By the end of the day, Credit Suisse shares were already year of scandal The bank’s top churn rate fell by 19%.

The plan devised by the bank’s newest management CEO Ulrich Kellner Chairman Axel Lehmann will include scaling back the business to focus more on wealth management and the Swiss domestic market.

“We are creating a new Credit Suisse with a simpler, more stable and more focused business model. Lehmann on thursday.

The costly restructuring will be funded by a CHF4 billion capital raise backed by the Saudi National Bank, whose investment will make it the largest Credit Suisse shareholder with 9.9% based on current holdings.

The deal with SNB, the Gulf’s largest commercial bank, was not well received by Credit Suisse shareholders and would dilute earnings per share by about a quarter.

The group’s top 10 shareholders said it would be “very painful to sell 10% of the bank for just CHF1.5 billion”. “Alternatives such as his partial IPO of Swiss Bank would have been better.”

David Hero, chief investment officer of Harris Associates, the bank’s current largest shareholder, was more supportive.

The exit from global investment banking and a doubling into wealth management, especially in the Middle East, has raised concerns among some shareholders and analysts about the impact of new investors in Saudi Arabia and whether reformed businesses are too conservative. It raises concerns that

“It certainly required radical surgery, but we have to wonder what new investors want from now on,” said the top 10 shareholder.

The three-year plan includes a significant reduction in Credit Suisse investment banking, the sale of a portion of the highly profitable securitized products business and the spin-out of CS First Boston. Across the business, he also includes CHF2.5 billion in spending cuts and plans to cut thousands of jobs.

The group is expected to reduce its headcount by 9,000 to 43,000 by 2025, with a reduction of 2,700 by the end of the year.

Over the next three years, the bank plans to move billions of dollars of risk-weighted assets from investment banking to wealth management, domestic banking and wealth management divisions. Revenue by 2025.

Analysts were skeptical of the plan, particularly the company’s modest medium-term earnings forecast, which targets a return on tangible equity of around 6% for the group by 2025.

“Our main concern is .

“Part of the reason for reallocating capital is to drive re-ratings, but only if the return outlook remains this low. Equities look cheap even after dilution, but This remains a risky investment as it is likely to experience significant execution risk in the coming months.”

A Credit Suisse executive said the conservative approach was a reflection of the large number of Swiss people running the bank. Many senior positions have gone to former executives at rival UBS.

“That Swissness comes out in modest estimates,” they said. “It creates a culture and way of working that is sustainable and not short-term oriented.”

The SNB’s involvement also raises questions about the future direction of Swiss banks. SNB issued a statement on Thursday saying the reason for its investment is to work with Credit Suisse to develop wealth management, wealth management and investment banking services in Saudi Arabia.

It also said it would explore a “strategic partnership” with a Swiss bank and consider investing in the spun-off CS First Boston business.

A Credit Suisse executive involved in talks with SNB said Saudi Arabia is a market the company plans to grow in and an investment in SNB would help it expand in the country.

“We have been in the Middle East for nearly 60 years and will be one of the strongest growth regions in the next decade,” they said. “This is a region we have been focusing on and we want to grow, especially because we have strong partners in the region.”

Credit Suisse already has two major Middle Eastern shareholders, the Qatar Investment Authority and the Olayan Group, an investment firm run by a wealthy Saudi family. Both own about 5% of Credit Suisse and bought their first shares during the financial crisis.

Despite significant headcount reductions, Credit Suisse announced last month that it would expand its presence in Doha, hiring 100 staff and launching a technology hub with Qatar’s investment promotion agency.

The investment in SNB marks Saudi Arabia’s growing interest in acquiring foreign assets.

Middle East sovereign wealth funds in Qatar, the United Arab Emirates and Kuwait bought stakes in Western banks and other troubled assets during the financial crisis, while Saudi Arabia’s public investment fund stood on the sidelines.

But under Crown Prince Mohammed bin Salman, who has transformed the PIF into one of the world’s most active sovereign wealth funds since taking over as chairman in 2015, Saudi Arabia has stepped up its focus on investing in Western assets. I became much more proactive in my approach. Rising oil prices have given countries more financial firepower to buy stocks.

SNB was formed from the merger of National Commercial Bank and Samba Financial Group, which was completed this year. Analysts say the merger will be driven in part by Riyadh’s desire to create a national champion for developing its financial services sector, as Crown Prince Mohammed seeks to plan the kingdom as a regional hub. The state-owned company owns just over 50% of SNB, with PIF being the largest shareholder.

Credit Suisse shareholders said they were concerned about Saudi influence on Credit Suisse, but those concerns were not shared among senior executives.

“From a wealth standpoint, the region is important to us, so it is important to have large investors there,” said a person involved in the discussion about investing in SNB. “Some other investors may have concerns, but that’s not what we’re concerned about.”

Additional reporting by Samer Al-Atrush from Riyadh and Stephen Morris from London