If Credit Suisse loves its bankers, release them
LONDON (Reuters Breakingviews) – Credit Suisse is a weak bank with a few strong bankers. Thus, President Axel Lehmann plans to bring in outside money to insulate these rainmakers from the unrest of the parent group. A more thoughtful gesture would be to find them a new, less troubled home.
Being one of the $12 billion company’s rainmakers is definitely less fun than it used to be. Their stock returns are under pressure, as Credit Suisse’s share price has fallen 60% since last February. And the risk of becoming unemployed also increases. As customer outbursts have unsettled the bank, the cost of insuring Credit Suisse’s debt against default has risen and is now more than double that of rival UBS.
Declining revenues and the drain of talent are now real dangers. Key dealmakers have left, including the bank’s co-global head Jens Welter. The group reduced its exposure to leveraged finance, one of its strongest businesses, to $5.9 billion in June from $10.2 billion at the start of 2021. Credit’s share Switzerland in the total sector costs decreased in mergers and subscriptions.
Lehmann is likely to announce sweeping cost reductions as part of a new strategy on October 27. The problem is, it might drive away the people he’d rather keep. One possibility, concocted with Michael Klein, board member and former Citigroup rainmaker, is an injection of outside capital directly into the investment bank. Gulf investors, including Abu Dhabi’s Mubadala and Saudi Arabia’s Public Investment Fund, could invest in a separate advisory and underwriting unit, Bloomberg reported.
This could fund retention payments for managing directors in the strongest areas of the bank, such as consumer staples and materials. Credit Suisse could also offer them private equity in a targeted transaction unit, rather than the struggling mothership, so they eat more of what they kill, in Wall Street parlance. By being one step away from Credit Suisse’s bigger problems, they could recapture the cloak and dagger spirit of previous acquisitions like First Boston and Donaldson, Lufkin & Jenrette.
But shares in a private investment bank can’t be used to buy Gucci loafers or a beach house, which is one of the reasons companies like Goldman Sachs and Lazard eventually went public. That would leave Lehmann under pressure to launch the separate unit, giving bankers and outside investors a way to turn their holdings into cash.
Imagine, then, that Credit Suisse spun off its advisory and capital markets businesses. Call it Second Boston. If the independent company can capture just over 2% of total industry merger and underwriting fees, roughly what it currently does according to Refinitiv data, it could have $3 billion in annual revenue. That’s assuming the global pot stands at $130 billion, halfway between this year’s depressed run rate and last year’s levels, based on Refinitiv data.
This could give it significant value relative to Credit Suisse’s market capitalization. Rival Perella Weinberg is trading at 0.7 times estimated earnings, according to Refinitiv. Moelis and PJT Partners are trading at around double their expected revenue. This suggests that Second Boston could be worth between $2 billion and $6 billion, equivalent to half of the Swiss bank’s total depleted value.
Lehmann could try to get the best of both worlds by floating a minority stake in its investment bank and keeping the rest. This is the path taken by industrial companies like General Electric when separating prized divisions. In this case, however, it’s probably a bad idea. Having a large shareholder would make the stock less liquid and could lower its value. Evercore, Lazard, Jefferies Financial, Greenhill, Moelis, Perella Weinberg and PJT have an average free float of 88%, according to Refinitiv data.
Credit Suisse might be better off considering a clean break. The 3,300 advisory and underwriting staff the bank last disclosed in mid-2020 offer little to the lender’s core businesses of wealth management and Swiss retail banking. Sometimes a billionaire client may want guidance for a management buyout or initial public offering. But Credit Suisse has never quantified the business it wins from intragroup referrals, suggesting they are low.
Second Boston might even find a second home in time. A large US retail bank like Truist Financial or Wells Fargo may one day hope to move into more wholesale banking. Traditional lenders could in theory finance the underwriting of loans and bonds with stable local deposits. Partnerships are another option. Jefferies has partnered with insurer MassMutual and Japan’s SMBC to help fund its leveraged finance unit.
The longer Lehmann waits, the more Credit Suisse’s value as a negotiating force erodes. He signaled that his bankers won’t necessarily have the bank’s balance sheet available to them, calling for a “capital-light” split earlier this year – another turnaround for ambitious consiglieri.
The value of an investment bank lies in its employees. In this case, it will be higher if these people are no longer with Credit Suisse.
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Sovereign wealth funds from Abu Dhabi and Saudi Arabia are considering investing in investment bank Credit Suisse, Bloomberg reported on Oct. 17. The group also plans to relaunch the First Boston brand, Bloomberg reported on Sept. 16.
First Boston was an American investment bank in which Credit Suisse first took a stake in 1978. The Swiss bank took full control in 1990 after First Boston suffered large losses on loans that she had granted to her clients. The brand was retired in 2005.
(Editing by John Foley and Oliver Taslic)
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