Credit Suisse’s options worsen as markets mayhem takes a toll

A sale of Credit Suisse’s structured-products group, which trades securitised debt, has attracted interest from potential buyers including BNP Paribas and Apollo Global Management, but there’s scepticism about how easy it will be to sell such assets – or secure good prices – when rising interest rates have put them under pressure. The broader backdrop for investment banking is hardly any rosier: BI estimates that fees in the US may have dropped by 50 per cent or more in the third quarter.

“Had they started to restructure a year or two ago, then they would have an easier time selling as there was more demand for risky assets,” said Andreas Venditti, a banks analyst at Vontobel. The firm has been doubly unlucky because it’s skewed towards investment bank activities that are struggling right now, including its leveraged-loans unit.

According to Venditti, the problem for chief executive Ulrich Koerner and chairman Axel Lehmann — the Swiss duo charged with designing a workable restructuring plan – is that fractious shareholders will react badly if the pair don’t take radical action to shrink the investment bank, after previous regimes ducked the hard choices. That may leave them little alternative other than to embark on an expensive restructuring.

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A sale of the asset-management unit – which suffered its own reputational hit from the implosion of Greensill Capital – is another potential money-spinner. Or Koerner and Lehmann could dust off the idea of former chief executive Tidjane Thiam and pursue an initial public offering of the domestic Swiss bank, which has held up relatively well as other parts of Credit Suisse have been engulfed by scandal and markets mayhem. That would, however, be tricky in a rough moment for IPOs.

One option would be bringing forward the publication of the strategy review, rather than enduring another three weeks of stock-market turmoil, although the management team will be wary of yet another botched C-suite attempt to cauterise the wounds. JPMorgan analyst Kian Abouhossein suggested the bank could bring forward an announcement on its third-quarter capital position, to back up the weekend message to investors that its balance sheet remains solid.

The experience of Deutsche Bank and Morgan Stanley might be instructive. The German lender’s 2016 crisis was sparked in part by the US Justice Department requesting $US14 billion to settle an investigation into residential mortgage-backed securities. Even after the bank ultimately reached a deal for about half that amount, the concerns weren’t allayed until it raised 8 billion euros ($12 billion) of fresh capital the next year.

Morgan Stanley faced its own surge in credit spreads from market rumours in 2011, when persistent chatter that it was heavily exposed to shaky European debt weighed on its stock and bonds. The firm’s biggest shareholder gave it public backing, but it took months for the price of the default swaps to fall as the feared losses never materialised.

Bloomberg

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