4 Investor Days and a Funeral

Debit Suisse remembrance month - part 1

I have seen the good, the bad, and the ugly of Company Investor Days over the years and fallen asleep at many of them but October 2022 was the scene of a crime of epic proportions.

It’s almost exactly two years on from that disaster when Debit Suisse told us that if it handed out billions of dollars in investment banker bonuses, spent billions of dollars on restructuring, and executed its plans perfectly it could 3 years later achieve - wait for it - a grand return on equity of 6%, well below its cost of capital.

The sick patient immediately entered a coma as confidence waned with shareholders and depositors running for the hills.

On July 26th, 2012 ECB President Mario Draghi said three words “whatever it takes”, as he defended the Euro and the European project. On March 2023 when asked if they would be open to providing Credit Suisse more capital, the Chairman of Credit Suisse’s largest shareholder the Saudi National Bank used five words: “The answer is absolutely not.”

The rest is history.

Before the funeral of Debit Suisse, there were 4 Investor Days. Technically there were other investor updates (actually even Investor Days) but not big ones. Anyway, the movie was called “Four Weddings and a Funeral” not “Four Weddings, 3 bachelor parties, and a Funeral.”

Before I start, I should give full disclosure that one of the main actors that shareholders had to face in this Fawlty Towers (British boomer humour) of Switzerland was a former boss of mine. I worked for him when he was head of European equity research for Credit Suisse. I have fond memories of him printing T-shirts with us as the number 1 ranked research department written on them during the dot com bubble. I recall looking at the actual surveys online and seeing we were 4th behind Merrill Lynch, Morgan Stanley, and UBS but as he reminded us “we are number 1 on an adjusted basis excluding the clients we don’t service”. It reminded me of the companies I was covering that used to say they were profitable on an adjusted EBITDA basis and then you would look at reported net income and sigh. But alas I digress, so let’s back to the 4 Credit Suisse Investor Days.

2015: Investor Day 1

Newly appointed CEO Tidjane Thiam came out of the gates at the start of his presentation with:

• Right-size the Investment Bank

• Reallocate capital

• Reduce fixed costs

• Transition non-core assets & implement closures

Then there was a focus on return on capital and how within the investment bank the macro trading desk and prime brokerage were the weakest links and actions need to be taken to shrink the businesses so they could cover their cost of capital. Unfortunately, Credit Suisse’s revenues declined faster than costs and capital in both businesses. The firm was a 2nd tier player in macro trading but this snapshot of profitability was also from a year when the macro trading industry wallet was near its trough (this wallet would double). As for prime services, as we found out later not only did shrinking in this case mean getting rid of lots of front-line risk managers (leading to future blow-ups) but shrinking prime brokerage impacts the rest of the equities business materially.

Nevertheless, on its face, the 2015 Investor Day presentation ticked a lot of boxes. A focus on recurring revenues, highly cash-generative and more stable wealth management, and Swiss business, and growth in Asia. Lots of charts about wealth creation in Emerging Markets. These were highly competitive markets with lots of local players but directionally it was hard to argue with even if a bit generic. There were also references to “One Bank” i.e. cross-selling across the bank which firms like Goldman Sachs are known for but in Credit Suisse’s case just meant more access for grifters like Lex Greensill.

In terms of financials, Credit Suisse’s 2015 cost base was around CHF20.5-21bn and it was targeting a reduction to CHF18.5-19bn. At the same time, it expected growth in some of the focus areas I highlight above and pre-tax profits to increase from an estimated CHF4.5bn in 2015 to CHF9-10bn in 2018. But these 2015 forecasts had some one-off items excluded and Q3 pre-tax profit was only CHF238m, a 2% return on equity.

2018: Investor Day 2

Fast forward 3 years and there was progress on many fronts. Costs came down significantly to CHF17bn. The proportion of risk-weighted assets that came from trading had declined from 50% to 33% of the group. Profits from trading also declined from 40% to less than 10% of the group.

The company had a scorecard of financial metrics where it used traffic lights and put green lights and wrote on track next to most of the divisional profits and group metrics. But here’s the thing. 3 years earlier they had said 2018 should generate CHF9-10bn of profits and this year was coming in at more like CHF3-4bn.

There was a game of musical chairs, being played in terms of different targets and disclosures. Revenues in focus areas grew not nearly as much as the target. Moreover, the trading/markets business had imploded in a weak environment. Markets revenues had declined by 35%.

The new target was return on tangible equity to grow from 6% in 2018 to 11-12% in 2020 driven by further cost savings.

2020: Investor Day 3

After all the previous failings, Credit Suisse had turned to a Zurich local and UBS/Credit Suisse lifer Thomas Gottstein to run the ship. He had dropped all of Thiam’s Asia rhetoric but the strategy to focus on wealth and continue to shrink the investment bank was the same at the 2020 Investor Day.

By 2020 return on tangible equity at 8.5% was well shy of management targets but the company said it would get to 10-12% by 2022. Profits of just over CHF5bn were broadly where Credit Suisse had been in 2014. The trading/markets revenue pool in areas like macro trading had grown but Credit Suisse had exited.

As ever with Credit Suisse Investor Days there was always a chart showing positive jaws in terms of revenues and costs but with restatements and a litany of exceptional items being excluded.

2022: Investor Day 4

By October 2022 Credit Suisse was running out of options and shareholders were running out of patience. Even longstanding top shareholder David Herro of Harris Associates had thrown in the towel.

Enter new CEO and even bigger member of the Lake Zurich crowd Ulrich Körner. More of the same strategy but try again. 2022 was shaping up to be a terrible year when even underlying returns on equity were negative.

Investment risk-weighted assets would be shrunk by 40% but the problem with all of this is that as a friend of mine who had just joined the risk department told me “We are selling assets badly and at big markdowns, everyone knows we are desperate”.

The Swiss may have been taking an axe to the investment bank but there were desperate moves to bring credibility and better management to the assets. There was a securitized products joint venture/asset sale soon announced with the mighty Apollo under poor terms. There was a carve-out also of investment banking under the highly original name First Boston. Most interesting was that it would be led by Klein of Arabia, who may not have come up with a credible business plan but negotiated the best signing-on deal since Citi acquired Old Lane to get Vikram Pandit’s services.

Having organized, attended, and reviewed dozens of such events the art of the Investor Day is to show some progress not on fake fudged metrics but actual revenues and profits (which Credit Suisse hadn’t) but also provide some exciting targets with a credible plan.

Credit Suisse which was barely profitable was going to take a CHF6.6bn hit (CHF in tax impairments and CHF2.9bn in restructuring costs) to shrink costs from CHF16.5-17bn in 2022 to CHF14.5bn. All this to get to a very low 6% return on tangible equity by 2025.

In the end, people just got fed up with the bluster. No one can say Debit Suisse didn’t have enough Investor Days!

As part of Debit Suisse remembrance month on this Substack, we will look back at the Flaming Ferraris, Frank Quattrone, and much more including the exciting new book by Duncan Mavin “Meltdown.”