Q3 2022 earnings and overhaul

Credit Suisse shares plunged 18% on Thursday after the Swiss bank posted a quarterly loss that was significantly worse than analyst estimates, and announced a massive strategic overhaul.

The embattled lender posted a third-quarter net loss of 4.034 billion Swiss francs ($4.09 billion), compared to analyst expectations for a loss of 567.93 million Swiss francs. The figure was also well below the 434 million Swiss franc profit posted for the same quarter last year.

The bank noted that the loss reflected a 3.655 billion Swiss franc impairment relating to the “reassessment of deferred tax assets as a result of the comprehensive strategic review.”

Under pressure from investors, the bank revealed a major overhaul of its business in a bid to address underperformance in its investment bank and following a raft of litigation costs that have hammered earnings. New CEO Ulrich Koerner told CNBC on Thursday it represented the beginning of a “transformation into a new Credit Suisse.”

In its widely anticipated strategic shift, the bank vowed to “radically restructure” its investment bank to significantly cut its exposure to risk-weighted assets, which are used to determine a bank’s capital requirements. It also aims to cut its cost base by 15%, or 2.5 billion Swiss francs, by 2025.

The bank expects to incur restructuring charges of 2.9 billion Swiss francs by the end of 2024.

The transformation plan will see Credit Suisse split off its investment bank into an independent business called CS First Boston, raise 4 billion Swiss franc in capital through the issuance of new shares and a rights offering, and create a capital release unit to wind down lower-return, non-strategic businesses.

Of the planned 4 billion Swiss franc capital raise, the bank revealed that 1.5 billion Swiss francs will come from the Saudi National Bank in exchange for a shareholding of up to 9.9%.

The aim is to reduce risk-weighted assets and leverage exposure by 40% each over the course of the restructure, while the bank also set out to allocate “almost 80% of capital to Wealth Management, Swiss Bank, Asset Management and Markets by 2025.”

Speaking to CNBC, Koerner said the bank will be “much more stable, will be sustainably profitable, much simpler in how it is set up, and for us, one of the most important things was how did we come to that solution? We started actually with the client needs and we designed everything around the client needs and ended up with what we are proposing today.”

Koerner took the helm in July following the resignation of predecessor Thomas Gottstein, after the bank booked a second-quarter net loss of 1.593 billion Swiss francs, far below consensus expectations among analysts. He said Thursday’s strategic overhaul represented a “very decisive action program.”

“Number one, a radical restructure of the investment bank; number two, a significant reduction of costs; and number three, a further strengthening of our capital base, and I think with that, we have all the necessary ingredients … to go where we want to go,” he added.

Credit Suisse has been plagued over the past year by sluggish investment banking revenues, losses from the withdrawal of its business in Russia and litigation costs relating to a host of legacy compliance and risk management failures, most notably the Archegos hedge fund scandal.

Here are some other financial highlights for the third quarter:

  • Group revenue hit 3.804 billion Swiss francs, down from 5.437 billion Swiss francs for the same period last year.
  • CET1 capital ratio, a measure of bank solvency, was 12.6%, compared to 14.4% at the same time last year and 13.5% in the previous quarter.
  • Return on tangible equity was -38.3%, down from -15% in the second quarter and 4.5% in the third quarter of 2021.

Execution risks

Vitaline Yeterian, senior vice president for global financial institutions at DBRS Morningstar, said the scale of the third-quarter loss was indicative of the stress Credit Suisse had suffered in its core business.

“Both in Q3 and 9M 2022, total revenues were below operating costs and well below peers in its core investment banking and wealth management businesses,” she said.

“The main drivers were much lower commissions and fees due to lower client activity, as well as lower trading revenues due to a drop in capital markets revenues. Meanwhile total net interest income was also down YOY (in Q3 and over 9M).”

The bank also saw an outflow of deposits and assets under management, which it attributed in part to reputational harm resulting from the Archegos and Greensill Capital sagas, along with a spike in withdrawals earlier this month following what the bank called “negative press and social media coverage based on incorrect rumors.”

Yeterian said the rejuvenation of the CS First Boston brand could “help to disconnect the IB from the repeated negative press coverage CS has been subject to.”

“We clearly see execution risks for the restructuring — in particular considering the challenging economic and geopolitical backdrops,” she added.

“The CET1 ratio was 12.6% at end-Q3 2022, down 90 bps vs end-June 2022. The capital increase will clearly provide some room to execute CS’s plan, although it is not fully secured.”