Credit Suisse Unveils Promised Reorg, Cuts Prime Brokerage In Pivot To ‘Catering To World’s Rich’

A couple of quarters have passed since Archegos, the family office of former “Tiger Cub” Bill Hwang, got hit with the margin call of a lifetime (mostly thanks to ViacomCBS announcing a  sale of a $3BN chunk of preferred stock) and collapsed spectacularly, forcing half a dozen megabanks to try and sort out an orderly exit from the fund’s highly-leveraged trades (to which they had unwittingly become principals) before Goldman Sachs and Morgan Stanley kicked down the door and liquidated Archegos’s positions in a series of massive block trades that fascinated Wall Street.

News of the blowup briefly turned the broader market red (not an easy feat in the era of Fed-induced easy money), sparking chatter about contagion, but it fell particularly hard on the shares of Credit Suisse and Nomura, whose prime brokerage businesses were the most exposed to Archegos’s positions. Both banks reported losses in the billions of dollars – with Credit Suisse reporting more than $5 billion in losses attributed to Archegos during the first quarter. In time, it was revealed the bank had earned only $17MM in revenue from its dealings with Archegos, which its PB desk had sought to placate in order to win more business.

The collapse of the family office prompted Democratic lawmakers like Elizabeth Warren to demand more transparency surrounding reporting of family office positions, since Archegos had managed to keep the fact that it effectively controlled more than 5% of ViacomCBS’s shares via its swap positions with various prime brokers a secret (funds are legally required in the US to report positions above that threshold).

Warren has continued to use the Archegos collapse as fuel for her criticisms of Fed Chairman Jerome Powell, whom she demanded resign back in September.

Credit Suisse swiftly fired a handful of senior (and not-so-senior) employees, including its chief risk manager and compliance officer, while promising shareholders it would reorganize its business, hinting that its prime brokerage and other risky businesses tied to hedge funds would be dramatically scaled back.

Well, the time has finally come for CS to deliver on this promise. Switzerland’s second-largest investment bank by assets released its Q3 earnings results early Thursday, alongside a plan to reorganize its sprawling business, exit most hedge-fund-financing related businesses.

As far as the results go, JPMorgan analyst Kian Abouhossein described them as “strong”, although others warned that shareholders should expect “further writedowns” as the restructuring plan progresses and more regulatory penalties are assessed (note: CS has recently been hit with penalties by American and British regulators that had nothing to do with Archegos). CS also warned of the potential for the bank to take a net loss during the final three months of the year. As for Q3, the bank reported lower net income of CHF434M vs. CHF546M YoY, a 21% drop.

As for the restructuring, the bank is using a tried-and-true playbook that has (so far, at least) worked for another struggling European banking giant: Deutsche Bank.

According to WSJ, the bank plans to make “catering to the world’s rich” its new central mission by consolidating its global operations in private banking and wealth management under one roof, while it plans to exit its prime brokerage and other businesses that help hedge funds finance trades.

But otherwise, its investment bank will remain mostly intact. What’s more, CS plans to expand its wealth management business with new hires, estimating that it will spend roughly $440MM on the restructuring effort. As a result of the reorg, the bank says it expects to take a 1.6 billion Swiss franc ($1.75BN) goodwill writedown that will likely be the cause of the expected Q4 loss.

More specific details about the restructuring effort – along with changes to the bank’s senior management – will be rolled out in January, according to Chairman António Horta-Osório, who affirmed that CEO Thomas Gottstein would remain in the CEO’s seat to oversee the restructuring.

Shares of the Swiss bank gyrated in the wake of the earnings report and announcement as investors digested the announcement with a fair bit of skepticism.

A Swiss bank catering to the world’s richest? Doesn’t UBS already do that?