Credit Suisse needs to make Bold Changes

The bank’s Archegos position is cleared, but more needs to be done to persuade investors that lender is on stable footing.

By guest author Rochelle Toplensky from the Wall Street Journal.

Credit Suisse CS has now taken the full financial hit for the bank’s exposure to collapsed family office Archegos. It may be just starting to feel the operational and cultural impact.

In the latest quarter, the bank lost another USD 600 million closing out its final positions related to Archegos, taking its total losses on the trades to USD 5 billion. The Swiss bank has been massively reducing its risk profile, leading to disappointing second-quarter results. Risk-weighted assets were cut by USD 20 billion and leverage exposure by USD 41 billion, mostly in its investment bank.

Credit Suisse also published a scathing 172-page independent report into its dealings with Archegos that called out “persistent failures” to manage flagged risks and “pervasive issues of business competence.” The bank had already made some of the changes the report recommended, including changing key leaders, moving all hedge funds to dynamic margins and strengthening existing risk processes.

Among the personnel changes, Credit Suisse has hired a chief risk officer from Goldman Sachs to do the slow, hard work of reforming the risk culture. The bank also fired nine employees and clawed back about USD 70 million in compensation from 23 people—implying it paid at least USD 3 million each to the couple of dozen people who cost it USD 5 billion.

The report will make juicy reading for regulators around the globe who also are looking into Archegos’s collapse. Their findings are to come. Credit Suisse could face fines or other sanctions and there are likely to be some marketwide changes, too.

Credit Suisse will probably remain in a holding pattern until new Chairman António Horta-Osório unveils his strategy, expected by year-end. It is a crucial opportunity to start rebuilding investor confidence after a bewildering year in which the bank was touched by multiple financial scandals. Better risk controls are vital, but more-dramatic action may be needed to signal a proper, deep clean-up.

The group’s investment bank is likely to be scaled back and could even be closed. Replacing the chief executive is another option: It would be a clear signal of intent, even though the problems mostly predate his leadership. More radically, Credit Suisse could seek a merger. Antitrust concerns and intense rivalry make a tie-up with local peer UBS unlikely, but a deal with Deutsche Bank just might be possible. The German lender’s overhaul will be completed next year and both banks’ shares are heavily discounted compared with their peers.

Whatever the plan, it will need to be bold and decisive. Credit Suisse’s remaining investors are a hardy bunch banking on a turnaround of the 165-year-old institution. For the share price to recover, others will need to be persuaded that real change is happening.