Credit Suisse hosted its top clients in October at the opulent Fontainebleau Miami Beach hotel, amid growing doubts that it was still in the securities trading game after a string of high-profile gaffes.

Investors and trading firms from BlackRock to CBOE Global Markets were treated to fireside chats with guests such as former US President George W. Bush, networking by the lavish hotel’s beachside pools, and fine dining. According to an executive at the three-day conference, the mood quickly turned sour.

Back in London, as the sun rose in Florida on day two, the Swiss bank’s executives were unveiling their latest restructuring plans – and the global securities trading business on display in Miami was in the crosshairs.

Credit Suisse said it needed billions of dollars in capital and planned to spin off the majority of its investment bank, sending its shares into a tailspin as a result of a $5.5 billion hit from the collapse of US investment firm Archegos in 2021, a retreat from the hedge fund business, and unprecedented client outflows.

Credit Suisse bankers at the Fontainebleau hotel were perplexed by the announcements and concerned about their jobs, according to an executive who declined to be identified.

Some of those bankers were let go in the following weeks, while others, such as Doug Crofton, then-US head of global equities, left to join competitors.

And a spectacular fall for what was once a key revenue generator for Switzerland’s second-largest bank followed, as some clients and investors withdrew, according to two people familiar with the situation who declined to be identified.

Since then, Credit Suisse has struggled to persuade investors that its overhaul will put the bank on a more solid footing – and how it will reorganize securities trading is a critical piece of the puzzle.

“No business is viable when its revenues vanish and expenses continue,” said Peter Hahn, emeritus professor of banking and finance at The London Institute of Banking & Finance. “Cost-cutting and efficiency can improve the profitability of a leading or even marginal business, but not a failing business.”

In response to Reuters’ questions for this article, a Credit Suisse spokesperson in London stated, “We never comment on rumours or speculation.”

Harris Associates, one of Credit Suisse’s largest shareholders in recent years, announced this week that it had sold its stake, indicating investor concern. David Herro, the bank’s chief investment officer, told the Financial Times that he had lost patience with the bank’s strategy for stemming persistent losses and a client exodus.

Trading would now serve the needs of the bank’s wealth clients – its primary focus – as well as work with CS First Boston (CSFB), its newly formed investment bank, under the overhaul announced by Chief Executive Ulrich Koerner in October.

Trading, which accounted for 26% of the bank’s revenue in recent years, would account for about 15% of sales at the revamped Credit Suisse by 2025, it said.

However, according to Credit Suisse’s most recent results, revenue from buying and selling stocks and bonds fell by 88% year on year in the last three months of 2022.

The drop in equities trading was especially severe. Revenue fell 95% to 18 million Swiss francs ($19 million) in the three months ending in December.

In February, Koerner told analysts that some of the investment bank’s losses were due to “intentional de-risking,” but he did not elaborate.

The bank has established a non-core unit to house unwanted activities that will be wound down or sold, but it is unclear which assets or portfolios will be moved.

However, according to one of the people with knowledge of the matter and a third source who declined to be identified, keeping the equities business in its current form is not the only option the bank has considered.

According to the two people, as Credit Suisse worked on its turnaround plan last autumn, executives informally considered selling some parts of the equity business, though the option was not formally reviewed by the board.

Managers said they did not pursue the option because they believed it would be difficult to find buyers.

According to the people, the complexity of separating the technology platforms that enable equity trading and then integrating them at another bank was another factor in Credit Suisse’s decision to wait.

Credit Suisse provided no comments.

According to Hahn of The London Institute of Banking & Finance, the fourth-quarter slump will make it more difficult to persuade investors that the bank should stay in the business.

In comparison, revenue from equity trading at five major Wall Street banks fell 10% on average during the same time period.

Even after Credit Suisse stopped financing hedge funds following the collapse of Archegos in March 2021, the equities business remained a significant source of revenue for the investment bank.

Credit Suisse makes money in equities by taking a cut on large volumes of shares it trades on behalf of clients and by structuring derivatives, or complex financial products, which are frequently sold to more sophisticated wealthy clients.

According to two people with knowledge of the situation, the drop in fourth-quarter revenue included a sharp drop in derivatives as customers avoided Credit Suisse after its credit rating deteriorated.

Following revisions to other credit agencies’ ratings, S&P Global Ratings downgraded the bank’s long-term rating to one step above junk in November.

The downgrades hurt the bank’s ability to attract clients, who instead sought safer and more appealing alternatives, according to three equities traders who structure derivatives at rival lenders.

The equities market is dominated by large US banks with the resources to consistently invest in the business and new technology, such as JPMorgan Chase, Morgan Stanley, and Goldman Sachs. According to Reuters, Credit Suisse is considering moving its equity research to CSFB.

By advising on transactions such as initial public offerings, CSFB hopes to become a “super boutique” with up to $3.5 billion in revenue. Working with Credit Suisse’s equities bankers to find buyers for shares would benefit CSFB.

Reduced equities business would put a further crimp in Credit Suisse’s investment bank ambitions.

“There are key question marks around the importance of the equities business given it requires huge scale to make it economically viable,” said Thomas Hallett, an analyst at Keefe, Bruyette & Woods.

“The group is stuck between a rock and a hard place.”

(Adapted from Reuters.com)

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