Credit Suisse Group AG (ADR) (NYSE:CS) has announced that they will be bringing in some new changes to its investment banking unit, after feeling the pressure from investors. Specifically, investors wanted Credit Suisse to reduce leverage risk and capital usage from its investment bank operations. The bank announced measures to cut leverage by $71.5 billion and bank officials have said they are contemplating whether to raise rates for services done for hedge funds. Additionally, the company is trying to grow influence from investment banking unit to the private banking unit. By the end of the third quarter, risk-weighted assets in the investment bank segment totaled 57% and the private banking segment held 43%. Investors are looking for a more equal exposure of 50-50.
However, being that investment banking is a very profitable venture for Credit Suisse Group AG (ADR) (NYSE:CS), management is wary of giving in to too much of what the shareholders are asking for because they are afraid that it will begin to impact earnings and profitability. That being said, Credit Suisse has already made significant cuts to its government bond and commodities divisions in the investment banking unit. These moves alone are estimated to have freed up 10-20 billion Swiss Francs of capital.
While the bank is giving in to shareholder demands, some at the bank are not thrilled with the changes and believe that they could have some impact on the bottom line of the bank’s earnings. An internal audit suggests that the bank could go in and make further cuts to the bank’s “global macro” segment which trades international government bonds and foreign exchange.
Greenhaven Road Capital commentary for the third quarter ended September 30, 2022. Q3 2022 hedge fund letters, conferences and more Dear Fellow Investors, The Fund is enduring its worst drawdown since inception. We were down again in the third quarter, bringing year -to-date returns to approximately -59%. Returns vary by . . . SORRY! This Read More
Credit Suisse down 11%
Overall, Credit Suisse Group AG (ADR) (NYSE:CS) has had a rough year, down over -11% year to date. Sales, quarter over quarter, rose 1.80%, but earnings per share skyrocketed 211% during the same period. The bank does have some debt with total debt to equity of 3.73, but cash per share of 331.55. With ample cash stockpiled and risky assets being trimmed, I think Credit Suisse is doing themselves a favor over the long term. Sure, the more risky asset trading operations such as commodities and junk bonds may bring in nice sums of commission, consulting fees, trading results, etc. but it certainly comes at a price. While things may be working out now, when the next downturn hits, these divisions would have made the bumps that much more strong and impactful. The new system will add money to the private banking unit, in an effort to jumpstart the segment and get more access to capital for the struggling business. Sometimes change is good, but when you are performing lousy in a given year, keep an eye out for people who want to make big changes and try to reinvent the wheel. Overall, however, these new measures should help keep Credit Suisse in better capital standing and safer.