Credit suisse messy drift requires a steer from gottstein

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Credit Suisse Chaotic Drift Requires Gottstein Steering

Credit Suisse shareholders will agree that 2022 is a year of transition for the bank. Opinions differ on the destination. Even more so after Wednesday's warning that a second-quarter loss is now likely. After Credit Suisse's involvement in the Archegos prime-broking and Greensill lending scandals, a clumsy investment banking division is in the spotlight. Prosaic poor performance is the problem this time.

The Swiss lender appears to be suffering from chaotic drift. The phenomenon previously affected Barclays, Deutsche Bank and Rolls-Royce. Unruly currents drive the sufferer from crisis to crisis. Each disaster can be considered individually exceptional. Together, they point to successive leadership failures and an entitled culture among employees.

This time, Credit Suisse's investment bank was plagued by market conditions rather than toxic clients and employees. Rising inflation and war in Ukraine meet a shrunken topline, largely from unfashionable interest rates and stocks.

Shares have fallen by two-fifths since the start of 2021, lagging the broader European banking sector by half. With a multiple of 0.4 times the material book value, they have never been more favorable.

The departure of "hands-on" chairman Antonio Horta-Osorio after violations of quarantine rules – and the arrival of a more traditional chairman figure in Axel Lehmann – means the buck stops with CEO Thomas Gottstein. After two years on the job, it's time for him to prove he's got Credit Suisse by the throat. It's not enough to replace a culture of frivolity at the investment bank with one of mediocrity.

Regulatory equity is another issue. Credit Suisse has ruled out funding. But the bank's room for maneuver appears limited. The common equity tier 1 ratio was 13.8 percent at the end of the first quarter. A target of 14 percent by 2024 remains in place. But on Wednesday, the bank announced it would operate at 13.5 percent in the short term.

Assuming retained earnings remain tight, about 3.5 billion Swiss francs ($3.6 billion) remain before the CET1 ratio falls to 12.2 percent, the level at which new capital was deemed necessary last year.

This leaves room for modest new legislation, which last year amounted to 1.2 billion. Franks totaled, but no explosions on the scale of Archegos. Europe is heading for a downturn. Gottstein better pray the last Credit Suisse skeleton has rattled out of its closet.