Credit Suisse said on Wednesday it will invest more capital in Asia Pacific and expects to double its 2014 pre-tax income of CHF 0.9 billion ($941 million) by 2018 as it shifts its focus to banking the region's growing cohorts of entrepeneurs.
Switzerland's second-biggest bank is also seeking to double its CHF133 billion ($139.2 billion) of client assets under management in the region by 2018. The news is part of a group wide strategic review which has prompted the bank to raise $6 billion in fresh capital and cut costs at its investment bank by CHF2 billion globally.
Demonstrating Asia Pacific's growing importance to the bank, Credit Suisse named regional CEO Helman Sitohang to its executive board.
AsiaPac also now has its own P&L as a standalone division. In the past there was a matrix of two business divisions, each with co-heads, and four regions. The group will be restructured to create three new, regionally focused divisions: Switzerland, AsiaPac and international wealth management.
“We plan to expand further in our core markets, capitalizing on our strengths in South East Asia and building out our China franchise,” said Sitohang in a statement about the review.
Earlier this month Credit Suisse said it was expanding equity research capabilities in China, adding headcount to meet growing demand for in-depth analysis of the country’s A-share market.
The bank intends to fund growth in AsiaPac via the run down of non-strategic business from RWA of CHF42 billion in the third quarter to CHF12 billion by end-2018.
As a result of the global strategy shift ratings agency Moody's placed the long-term ratings of Credit Suisse on review for a possible downgrade due to the drag on profitability the plan will cause over at least the next two years. Profit challenges will stem from restructuring charges and costs likely to be incurred through the wind-down or exit of businesses no longer considered strategic.
Credit Suisse reported record results for Asia Pacific, with revenues rising to CHF3 billion up 17% and pre-tax income at CHF1.1 billion, up 48%, for the first nine months of the year. The bank said the increase was driven partly by integrating private banking, wealth management and investment banking products.
Credit Suisse is the third biggest private bank in Asia after UBS and Citigroup, according to rankings published by Asian Private Banker.
Sitohang thinks the Swiss bank is particularly well placed to capture business given its business model that embraces tycoons and China’s growing legion of tech entrepreneurs.
“The One Bank model is well suited to this region – that is the partnership between the private bank and the investment bank,” said Sitohang in an interview with FinanceAsia earlier this year.
Deal making led by newly minted billionaires is boosting Credit Suisse Asia’s revenue contribution to the Swiss bank. The region now accounts for 15% of total Credit Suisse revenues and 28% of pre-tax income. In the first nine months it gathered CHF14.7 billion of net new assets, representing 55% of the bank’s total private banking net new assets.
The results come after Tidjane Thiam took the helm on July 1. As the former man from the Pru puts his stamp on the bank he will find private banking returns broadly double those of the investment bank, according to an analysis by Goldman Sachs.
From a shareholder’s perspective, further investment banking cuts would result in higher returns and hence higher valuation. Some analysts have called for Credit Suisse’s investment bank to be closed altogether.
To be sure, several senior investment bankers have already left Credit Suisse's Asian franchise this year including David Cheng, the bank’s Asia head of corporate finance, Jan Metzger, the Asia-Pacific head of technology, media and telecommunications and Zhang Liping, co-chief executive officer for Greater China who joined Blackstone.
Sitohang believes Credit Suisse in Asia will likely be well-rewarded under the new regime, despite calls for cuts from the stock analyst community.
“In Asia Pacific, the good news for us is that our return on capital is way above our global average; our cost to income is also better so practically, capital will move towards more higher return areas – so I think we will be a beneficiary of that – my job is to make sure that the growth continues,” said Sitohang.
According to the Credit Suisse Research Institute Family Business Model 2015 report first generation entrepreneurs drive 57% of wealth creation in Asia Pacific.
Global banks are looking to Asia to drive growth and profits. For Credit Suisse, that has been the case for the last two years.
In the past financial innovation and strategy shifts has begun mainly in the US or Europe and been rolled out in Asia afterwards. Now the Swiss bank is looking to import business practice from Asia to other emerging markets.
The 'One Bank' concept was launched by CEO Oswald Grübel in 2006 and pursued aggressively by Brady Dougan but has worked particularly well in Asia.
In terms of ultra-high-net-worth (UHNW) individuals, those with net assets exceeding $50 million, China ranks second after the US with 7,631 UHNW individuals (6% of the global total).
This policy has helped it win work from Chinese e-commerce giant Alibaba. Credit Suisse worked on its $25 billion IPO in 2014 and its private bank facilitated management’s philanthropic endeavors as it has around the region.
Credit Suisse also acted as joint bookrunner on Alibaba’s $8 billion senior unsecured notes offering in September 2014, and said it is the only bank with lead roles in seven offshore M&A, capital raising and financing transactions with Alibaba since 2012.
This growing opportunity for banking means Sitohang will be deploying more resources in China.
“Greater China will have a bit more emphasis within the business given the growth in the market and the number of high net worth individuals,” said Sitohang.
Credit Suisse’s closest rival, UBS, is also making the most of its long-standing joint venture in China.
In 2012, the strategies of the major European investment banks decoupled. UBS announced a reorientation towards private banking with Barclays following suite. However Deutsche Bank and Credit Suisse remained on their previous course.
However Credit Suisse's earnings have been under pressure for several years stemming from the combined effect of the low interest rate environment, restructuring charges, litigation and regulatory charges, losses in non-strategic units, and low levels of client activity. Although the bank
has realized significant cost savings from the restructuring and efficiency initiatives undertaken following the financial crisis, increased compliance and regulatory costs have at least temporarily
offset much of the benefit of those savings.
Since 2012, CS has cut its investment bank by 22% on a risk-weighted assets basis, less than most of its European peers and well below the 56% cut at UBS. To match UBS, Credit Suisse would need to cut a further $71 billion in Goldman Sachs’ estimation. It took UBS around two years to make the cuts.
Goldman analyst Jernej Omahen thinks Wednesday's announcement was a good start: "All in, we see the balance of the announcements as positive," he said in a report.