Cleanly spinning off investment banking would be more convenient than seeking foreign capital to maintain it
Credit Suisse is a weak bank with some strong bankers. For this reason, its president, Axel Lehmann, is considering the possibility of contributing external money to insulate these merger wizards from the turbulence of the matrix. A more supportive gesture would be to find them a new, less problematic home.
Being one of the investment bankers at the $12 billion firm is certainly less fun than it used to be. Its stock rewards are under pressure as the stock price is down 60% since February. And the risk of being out of work also increases. Customer problems have destabilized the bank, and the cost of insuring Credit Suisse’s debt against default has risen, and is now more than double that of arch-rival UBS.
Falling revenues and flight of talent are now real dangers. The main people in charge of corporate operations have left, including the co-head of global banking Jens Welter. The group reduced its exposure to leveraged finance, one of its strongest businesses, to €5.9bn in June, down from €10.2bn at the beginning of 2021. Credit Suisse’s share of total sector fees has been falling by mergers and subscription.
Lehmann is likely to announce deep cost cuts as part of a new strategy on the 27th. The problem is that doing so may alienate people you’d rather keep. One possibility, dreamed up with Michael Klein, a board member and former Citigroup merger banker, is an injection of outside capital directly into the investment bank. Gulf investors, including Abu Dhabi’s Mubadala and the Saudi Arabian Public Investment Fund, could contribute money to an underwriting and advisory unit, reports Bloomberg.
This could finance the retention payments of the CEOs of the strongest areas of the bank. Credit Suisse could also offer them private shares in a unit focused on conducting trades, rather than the mothership in distress, so they eat more than they kill, in Wall Street parlance. By staying away from Credit Suisse’s big problems, they could recapture the adventurous spirit of earlier purchases, such as First Boston and Donaldson, Lufkin & Jenrette.
But shares in a private investment bank can’t be used to buy Gucci loafers or a beach house, which is one reason firms like Goldman Sachs and Lazard went public. That would leave Lehmann under pressure to take the spun-off unit public, giving bankers and outside investors a way to turn their holdings into cash.
Imagine, then, that Credit Suisse spins off its capital markets and advisory business. Let’s call it Second Boston. If the standalone company can grab just over 2% of the industry’s total merger and underwriting fees, roughly what it does now, Refinitiv says, it could have $3bn in annual revenue. That’s assuming the global jackpot settles at $130 billion, midway between this year’s depressed pace and 2021 levels.
That could give it considerable value relative to Credit Suisse’s own market capitalization. Her rival Perella Weinberg is trading at 0.7 times estimated earnings. Moelis and PJT Partners do so at around double their expected revenue. This suggests that Second Boston could be worth between 2 billion and 6 billion, which is equivalent to half of the depleted value of the Swiss bank.
Lehmann could try to get the best of both worlds, taking a minority stake in its investment bank public and keeping the rest. That is the path that industrial firms like General Electric have taken by separating prized divisions. In this case, however, it’s probably a bad idea. Having a large shareholder would make the stock less liquid and could depress its value. Evercore, Lazard, Jefferies Financial, Greenhill, Moelis, Perella Weinberg and PJT have a free-float average 88%.
Credit Suisse might want to consider a clean break. The 3,300 advisory and underwriting employees the bank last unveiled in mid-2020 offer little to the core businesses: wealth management and Swiss retail banking. Occasionally, a multimillionaire client may want advice on a management buyout or IPO. But Credit Suisse has never quantified the business it gains from intra-group recommendations, suggesting it is low.
Second Boston might even find a second home in time. A large US retail bank, such as Truist Financial or Wells Fargo, might one day hope to get into wholesale banking. Conventional banks could, in theory, finance the subscription of loans and bonds with constant local deposits. Associations are another option. Jefferies has teamed up with insurer MassMutual and Japan’s SMBC to help finance its leveraged finance unit.
The longer Lehmann waits, the more Credit Suisse’s value as a negotiating force will erode. He has pointed out that his bankers won’t necessarily have the bank’s balance sheet at their disposal, calling for a “capital light” split early this year: another disappointment for consiglieri ambitious.
The value of an investment bank is its people. In this case, it will be higher if those people are no longer with Credit Suisse.
