There was a sharp decline of 18% in the shares of Credit Suisse (NASDAQ: CS) on Thursday following the announcement of a quarterly loss much higher than analyst expectations and the announcement of a comprehensive reorganization of the Swiss bank’s business strategy.
The troubled financial institution reported a net loss for the third quarter of 4.03 billion Swiss francs ($4.09 billion), which was far more than the loss analysts had anticipated, which was 567.93 million Swiss francs. The sum was likewise a significant drop from the profit of 434 million Swiss francs that was reported for the same quarter the previous year.
Following a slew of lawsuit expenses that have crushed profitability, the bank disclosed a substantial reorganization of its business in response to demand from investors to address underperformance in its investment bank.
This comes after a string of litigation costs that have hampered earnings. On Thursday, the new CEO of Credit Suisse, Ulrich Koerner said that the move marked the beginning of a “transformation into a new Credit Suisse.”
The bank has promised to radically restructure its investment bank. This will result in a large reduction of the bank’s exposure to risk-weighted assets, which determine the amount of capital a bank requires to maintain. In addition, it plans to reduce its cost base by 15%, equivalent to 2.5 billion Swiss francs by 2025.
By the end of 2024, the bank anticipates having incurred restructuring expenses totaling 2.9 billion Swiss francs.
Credit Suisse’s investment bank will be spun off into a separate company, CS First Boston, as part of the transformation plan. Credit Suisse will also raise 4 billion Swiss francs in capital through issuing new shares and a rights offering. It will also establish a capital release unit to wind down lower-return businesses that are not strategic to the company’s long-term goals.
The bank disclosed that the Saudi National Bank would provide 1.5 billion Swiss francs as part of the proposed capital issue of 4 billion Swiss francs. In exchange for ownership of up to 9.9%, the Saudi National Bank will receive these funds.
The restructure is intended to bring the leverage exposure down by forty percent. In addition, the bank intends to allocate “almost 80 percent of capital to Wealth Management, Swiss Bank, Asset Management and Markets by the year 2025.”
In an interview with CNBC, Koerner stated that the bank will be “far more stable, will be sustainably profitable, and will be considerably simpler in how it is set up. And one of the most significant things for us was how we came to that solution?” We began with the client’s requirements, then designed everything to fit those requirements, and finally arrived at the solution that we are presenting to you today.
Koerner took over as CEO in July, following the resignation of his predecessor, Thomas Gottstein, after the bank reported a net loss for the second quarter of 1.593 billion Swiss francs. This result was far lower than the expectations that the majority of experts had established. He described the revamp of the strategy that took place on Thursday as a “very decisive action program.”
“Number one, a dramatic restructure of the investment bank; number two, a considerable decrease of costs; and number three, a further strengthening of our capital basis,” he said, “and I think with that, we have all of the required ingredients… to proceed in the direction that we want to go,” he continued.
Other noteworthy financial events that occurred during the third quarter include the following:
- The group’s income came in at 3.804 billion Swiss francs, which is lower than the 5.437 billion Swiss francs it brought in during the same period the previous year.
- The CET1 capital ratio, a measure of a bank’s solvency, was 12.6%, whereas it was 14.4% during the same period the previous year and 13.5% during the preceding quarter.
- During the third quarter of 2021, the return on tangible equity was 4.5%, significantly lower than the return of -15% recorded during the second quarter.