Credit Suisse Stock Falls 12% After The Bank Reports A Massive Loss For The Third Quarter And Plans A Strategic Makeover

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Last Updated on October 27, 2022 by Bitfinsider

On Thursday, shares of Credit Suisse fell by more than 12 percent after the Swiss bank reported a quarterly loss that was much higher than analyst projections and announced a comprehensive reorganization of its business strategy.

The troubled financial institution reported a net loss for the third quarter that was 4.03 billion Swiss francs ($4.09 billion), which was far more than the loss that analysts had anticipated, which was 567.93 million Swiss francs. The sum was likewise a significant drop from the profit of 434 million Swiss francs that was reported for the same quarter the previous year.

The bank stated that the loss was due to the “reassessment of deferred tax assets as a result of the comprehensive strategic review,” which resulted in an impairment of 3.655 billion Swiss francs and caused the loss.

Following a slew of lawsuit expenses that have crushed profitability, the bank disclosed a substantial reorganization of its business in response to demand from investors to address underperformance in its investment bank. This comes after a string of litigation costs that have hampered earnings. On Thursday, the new CEO of Credit Suisse, Ulrich Koerner, gave an interview to CNBC in which he said that the move marked the beginning of a “transformation into a new Credit Suisse.”

The bank has promised to “radically restructure” its investment bank as part of its widely anticipated strategic shift. This will result in a large reduction of the bank’s exposure to risk-weighted assets, which are used to determine the amount of capital that a bank is required to maintain. In addition to this, it plans to reduce its cost base by 15%, which is equivalent to 2.5 billion Swiss francs by the year 2025.

By the end of 2024, the bank anticipates that it will have incurred restructuring expenses totaling 2.9 billion Swiss francs.

Credit Suisse’s investment bank will be spun off into a separate company called CS First Boston as part of the transformation plan. Additionally, Credit Suisse will raise 4 billion Swiss francs in capital through the issuance of new shares and a rights offering, and it will establish a capital release unit to wind down lower-return businesses that are not strategic to the company’s long-term goals.

The bank disclosed that the Saudi National Bank will provide 1.5 billion Swiss francs as part of the proposed capital issue of 4 billion Swiss francs. In exchange for an ownership of up to 9.9%, the Saudi National Bank will receive these funds.

During the course of the restructure, it is intended to bring the risk-weighted assets and leverage exposure down by a combined total of forty percent. Additionally, the bank intends to allocate “almost eighty percent of capital to Wealth Management, Swiss Bank, Asset Management and Markets by the year 2025.”

Koerner, in an interview with CNBC, stated that the bank will be “far more stable, will be sustainably profitable, and will be considerably simpler in how it is set up. And for us, one of the most significant things was how did we come to that solution?” We actually began with the requirements of the client, then designed everything to fit those requirements, and finally arrived at the solution that we are presenting to you today.

Koerner took over as CEO in July, following the resignation of his predecessor, Thomas Gottstein, after the bank reported a net loss for the second quarter of 1.593 billion Swiss francs. This result was far lower than the expectations that had been established by the majority of experts. He described the revamp of the strategy that took place on Thursday as a “very decisive action program.”

“Number one, a dramatic restructure of the investment bank; number two, a big reduction of costs; and number three, a further strengthening of our capital basis,” he continued, “and I think with that, we have all of the required elements… to go where we want to go.” [Citation needed]

Over the course of the past year, Credit Suisse has been plagued by sluggish investment banking revenues, losses from the withdrawal of its business in Russia, and litigation costs related to a host of legacy compliance and risk management failures, most notably the Archegos hedge fund scandal. All of these issues have contributed to a decline in the company’s overall profitability.

According to Vitaline Yeterian, senior vice president for global financial institutions at DBRS Morningstar, the magnitude of the loss that Credit Suisse incurred during the third quarter was an indication of the strain the company experienced in its primary business.

She stated that the company’s overall revenues were much lower than its operational costs and competitors in its primary investment banking and wealth management businesses during the third quarter and the first nine months of 2022.

“The primary contributors were significantly reduced commissions and fees as a result of decreased customer activity, in addition to decreased trading revenues as a result of a drop in capital markets revenues. While this was going on, the overall amount of net interest income was also down year-over-year (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. Additionally, the bank saw a spike in withdrawals earlier this month following what the bank referred to as “negative press and social media coverage based on incorrect rumors.”

Yeterian suggested that the revitalization of the CS First Boston brand might “help to separate the IB from the persistently unfavorable press coverage CS has been subjected to.”

She went on to say that “we obviously perceive execution concerns for the restructuring,” particularly when taking into consideration the difficult economic and geopolitical backdrops.

“The CET1 ratio was 12.6% at the end of Q3 2022, which is a decrease of 90 bps compared to the end of June 2022. Even while CS’s plan is not completely solidified, the capital boost will undoubtedly open up some new avenues for its implementation.

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