Credit Suisse on Wednesday announced that CEO Thomas Gottstein would step down as the bank reported a massive second-quarter loss, as poor investment bank performance and mounting litigation provisions hammered earnings.
The embattled Swiss bank posted a net loss of 1.593 billion Swiss francs ($1.66 billion), far below consensus expectations among analysts for a 398.16 million Swiss franc loss.
In a statement Wednesday, Gottstein said the second-quarter results were “disappointing” and that the bank’s performance was “significantly affected by a number of external factors, including geopolitical, macroeconomic and market headwinds.”
“The urgency for decisive action is clear and a comprehensive review to strengthen our pivot to the Wealth Management, Swiss Bank and Asset Management businesses, supported by a fundamental transformation of our Investment Bank, is underway,” he said.
“Today marks a leadership change for Credit Suisse. It has been an absolute privilege and honor to serve Credit Suisse over these past 23 years. It has been my passion since day one to deliver best-in-class service to our clients.”
Gottstein, who took the reins in early 2020 following the resignation of predecessor Tidjane Thiam after a spying scandal, will be replaced by Ulrich Koerner, previously CEO of the bank’s asset management division.
Credit Suisse Chairman Axel Lehmann in May gave his full backing to Gottstein and denied reports that the board had discussed replacing him. He told CNBC on Wednesday that Gottstein was “a great guy” who did a “great job,” but that two key changes had arisen since that conversation at the World Economic Forum in Davos.
“First, we embarked on a thorough strategy review and we announced today that we are speeding up our transformation, and Thomas has decided that at that point of time, also for personal reasons, it is better to do a change,” Lehmann said, adding that Gottstein was “instrumental” in developing the strategic review.
“He stands fully behind it, but at a certain point of time, you need to have the full energy, and I think at that point, he and I felt it is better to change and bring in somebody like an Ulrich Koerner, who has, I think, a great track record on operational transformation.”
Koerner, a Credit Suisse veteran, will take over as CEO with immediate effect, and Lehmann said that on one hand, his appointment represents a “continuation” of the transformation efforts that began under Gottstein.
“[Koerner] knows banking inside out. He was building businesses, he was COO in large organizations, so he has a truly front to back, and I call it, a back to front, approach,” Lehmann said.
“He will take over with immediate effect and he will drive the transformation that we will speed up.”
Investment bank hit
The investment bank was hit by significantly lower capital markets issuance activity and reduced client activity, Credit Suisse said in a summary on Wednesday, acknowledging that the division’s positioning “was not geared towards benefiting from the volatile market conditions” and its areas of strength, such as capital markets, were “significantly impacted.”
A 29% annual decline in group net revenue was driven primarily by a 43% fall in investment banking revenues and a 34% slide in wealth management revenues, while asset management revenues also fell 25%.
“In the Investment Bank, while we have a robust pipeline of transactions, these may prove difficult to execute in the current market environment,” Credit Suisse warned in its report.
“Trading so far in 3Q22 has been marked by a continued weakness in client activity, exacerbating normal seasonal declines, and we would expect this division to report a further loss this quarter.”
Operating expenses climbed 10% year-on-year and included major litigation provisions of 434 million Swiss francs relating to multiple legal matters.
String of scandals
Wednesday’s dismal earnings report comes on the back of a net loss of 273 million Swiss francs in the first quarter, as Russia-related losses and continued litigation costs arising from the Archegos hedge fund scandal dented the bank’s income.
In the second quarter of 2021, Credit Suisse’s net income reached 253 million Swiss francs, a 78% drop from the previous year, after taking a 4.4 billion franc loss following the collapse of Archegos.
The Archegos saga led to the departure of Credit Suisse’s investment bank chief and chief risk and compliance officer, and was preceded by a separate shakeup in the asset management division in the wake of the collapse of British supply chain finance firm Greensill Capital. Credit Suisse ran $10 billion in funds tied to Greensill.
Maria Rivas, senior vice president for global financial institutions at DBRS Morningstar, highlighted that the second-quarter’s losses were equivalent to the full-year’s losses in 2021, when results were negatively affected by the Archegos writedown, higher litigation costs and a goodwill impairment.
“Similar to Q1 2022, the Q2 2022 Pre Tax Loss continued to be negatively impacted by high litigation provisions, losses from its equity investment in Allfunds, and restructuring costs (CHF 80 million),” Rivas said in an email Wednesday.
“However, the uncertain economic environment and market volatility also negatively impacted Q2 results through marked to market losses on leverage finance exposures and significantly lower revenues from capital markets. And this negative impact is likely to continue in coming quarters, triggering the deeper strategic review announced today.”
Credit Suisse warned early in June that it was likely to post a loss for the quarter, citing the deteriorating geopolitical situation, aggressive monetary policy tightening from central banks and the unwinding of Covid-19 era stimulus measures.
The bank said at the time that this confluence of adverse conditions had caused “continued heightened market volatility, weak customer flows and ongoing client deleveraging, notably in the APAC region.”
Despite the challenging backdrop, Credit Suisse vowed at an Investor Deep Dive event in late June to forge ahead with its risk management and compliance overhaul, which was launched following a string of scandals and aims to reform its risk, compliance, technology and operations functions, along with the wealth management business.
- Group revenue hit 3.645 billion Swiss francs, down from 5.103 billion for the same period last year.
- CET1 capital ratio, a measure of bank solvency, was 13.5%, compared to 13.7% at the same time last year.
The bank also faces a potential $600 million hit from a court case in Bermuda relating to its local life insurance arm, as legacy scandals continue to hammer its balance sheet.
Complete management overhaul
Gottstein’s departure is the latest in a string of senior management changes at the bank, and aside from other management changes announced in the investment bank to support the reshaping of the business, Lehmann indicated on Wednesday that no more major changes were on the horizon.
DBRS Morningstar’s Rivas said the change in CEO “completes the full management overhaul needed to restore confidence after 2021 events.”
“In the last 15 months, there have been significant management changes at board level and business level but the CEO was part of the management team prior to Archegos and Supply Chain Finance issues,” she said.
“The appointment of Ulrich Körner, CEO of Asset Management, is not only intended to restore investor confidence but underlines the Group’s commitment to strengthen the Asset Management business, that has been adversely impacted after the Supply Chain Funds management issues and has reported money outflows for some quarters now.”