Credit Suisse carcass feeds many hungry mouths

LONDON, March 15 (Reuters Breakingviews) - The beasts of the investment banking jungle have feasted on Credit Suisse’s carcass. In the year since the Swiss lender collapsed, competitors have carved off its employees, clients, and assets. Arch-rival UBS (UBSG.S), opens new tab grabbed most of the spoils, but other banks have also benefited from the feeding frenzy. Less clear is whether the survivors will be more responsible than Credit Suisse was when activity picks up.

Volatile as an investment bank’s business is, it’s very rare for a large one to disappear. Lehman Brothers was the last global firm to close its doors when it filed for bankruptcy in September 2008. Credit Suisse only avoided that grisly fate by accepting a lowball rescue bid from UBS on March 19, 2023. Nevertheless, the large overlap between the two banks – and the buyer’s appetite for only the choicest cuts – meant there were plenty of remains to go around.

UBS doubtless got the best bits. CEO Sergio Ermotti is not yet prepared to declare the takeover the “deal of the century”, as many rivals have dubbed it. However, the headline numbers are striking. The enlarged firm manages assets worth $3.9 trillion for wealthy clients, making it the dominant private bank outside the United States. It is responsible for a quarter, opens new tab of all loans in its home market of Switzerland. And it plans to slash $13 billion from its combined cost base, creating a more efficient institution in the process.

In dealmaking and trading, the picture is more nuanced. It’s more than a decade since UBS scaled back to focus mainly on serving corporate and wealthy private clients rather than other financial firms. Executives pulled out of balance sheet-intensive trading operations and capped the division’s risk-weighted assets. This was a different strategy from Credit Suisse, which specialized in more complex structured credit and financing. When the two came together, large chunks of Credit Suisse’s investment bank were surplus to requirements.

Balance sheet figures tell the story. At the end of 2022, UBS’s investment banking unit was operating with risk-weighted assets of $93 billion, while Credit Suisse’s division was only slightly smaller at $80 billion. A year on, the combined investment bank weighed in at just $106 billion, while a chunky $72 billion languished in the “non-core and legacy unit” that UBS is winding down.

All bank mergers leak revenue. Large companies which previously dealt with both institutions may be reluctant to give the same volume of business to one bank. Trading counterparties limit the amount to which they are exposed to a single institution. Disgruntled bankers leave for rivals, while unsettled clients entertain pitches from other providers. Such negative synergies are one reason why deals involving big banks are so rare. Yet UBS had the advantage of getting a cheap deal. It paid just 3 billion Swiss francs ($3.39 billion) for Credit Suisse equity and benefited from Swiss regulators wiping out 16 billion Swiss francs of its target’s subordinated bonds. As a result, Ermotti and his team could afford to be picky about the bits they wanted to keep.

The main benefit for UBS’s investment bank is beefing up its advisory business, particularly in the United States, where it has long struggled against entrenched Wall Street rivals. The Swiss firm has added 125 managing directors to its global banking division, half of whom are in North America. That should translate into more work on mergers and initial public offerings, particularly for private equity groups and technology firms. A broader slump in activity has masked the benefits, though. In 2022, Credit Suisse and UBS earned combined investment banking fees of $3.5 billion, which would have ranked them sixth among global peers according to LSEG data. Last year the pair brought in just $2.2 billion, ranking seventh.

Meanwhile, other banks have muscled in. Banco Santander (SAN.MC), opens new tab of Spain has added 200 bankers to its team in the United States including David Miller, Credit Suisse’s former co-head of investment banking. Deutsche Bank (DBKGn.DE), opens new tab has also scooped up bankers, as have boutiques like Moelis (MC.N), opens new tab.

Yet it is Credit Suisse’s trading activities where the real carve-up has taken place. Last year, global markets revenue at the world’s 11 largest trading houses was 6% lower than in 2022, according to data compiled by Coalition Greenwich. For UBS and Credit Suisse, however, markets revenue was down 32% compared with what the two generated in the previous year.

Indeed, Credit Suisse was already retrenching before UBS stepped in. It wound down its prime brokerage business in 2021 after losing $5.5 billion in the collapse of Archegos Capital Management, enabling rivals including BNP Paribas (BNPP.PA), opens new tab and Barclays (BARC.L), opens new tab to beef up, opens new tab their operations serving hedge funds. Other activities have shifted out of the banking system altogether. Late last year, Credit Suisse offloaded its securitized products unit, which packages loans and sells them as securities, to Apollo Capital Management for an undisclosed sum. With it went $37 billion in assets and almost 200 people.

In most industries, consolidation tends to reduce competition and help the surviving players. In theory, removing an erratic rival should ensure other banks emerge bigger and stronger when trading activity and advisory fees recover. That would enable them to earn better returns and resist the temptation to push into unprofitable lines of business.

The reality is more complicated. The investment banking industry periodically attracts ambitious institutions eager to elbow their way onto the top table. In doing so, they are tempted to undercut established rivals, push up pay for bankers and traders, and take on excessive risks. Credit Suisse did this for years: Former hedge fund manager Marc Rubinstein calculated that the firm racked up a cumulative loss, opens new tab of $3.4 billion in its final decade.

Bank deals have a mixed track record, even when the target is distressed. In 2008, Barclays and Nomura (8604.T), opens new tab swooped in to carve up the employees and operations of the bankrupt Lehman Brothers. Yet the pair have struggled to consistently earn an adequate return in investment banking. Credit Suisse may have disappeared. But it’s far from clear that its demise has made the rest of the global banking industry more rational or restrained.

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CONTEXT NEWS

On March 19, 2023, UBS said it was acquiring Credit Suisse in a deal worth about 3 billion Swiss francs.

($1 = 0.8837 Swiss francs)