Communications Disaster Credit Suisse Discord Rattles Investors

Switzerland's second-largest bank worried investors last month after suffering millions in losses on a bond portfolio. But now its disastrous handling of the fallout has horrified shareholders and sparked rumors of a fresh power struggle.
Credit Suisse CEO Tidjane Thiam and Chairman Urs Rohner haven't been seeing eye to eye lately.

As Credit Suisse’s top brass gathered in Hong Kong for the Swiss bank’s annual Asia investment conference this week, one thing was at the forefront of everyone’s mind, and it wasn’t the bank’s controversial restructuring plans. Rather it was: stay on message.

In fact, the main objective of Tidjane Thiam, the bank's chief executive since July of last year, and Chairman Urs Rohner was not to confuse investors with any mixed messages or shows of disunity.

The reason for the united front was a communications disaster last month over a multi-billion euro portfolio of hard-to-sell, high-yield bond products. The portfolio recently lost Switzerland's second-largest bank millions of euros.

Its leadership compounded the problem by issuing contradictory statements about the losses – to the horror of its shareholders and prompting speculation of a power struggle at the top.

When analysts asked Mr. Thiam in late March why Credit Suisse had not reduced its risky positions earlier, he said that he had no knowledge of the portfolio's existence when preparing his strategic plan in the summer, and that he had only learned of it in January. He admitted it was unacceptable and that there had been "consequences."

That was unusual enough, but then it got worse when Mr. Rohner contradicted his chief executive a few days later.

Bank insiders are downplaying the issue, saying that there are no differences between Mr. Thiam and Mr. Rohner.

"There were no blind spots," Mr. Rohner said at a finance conference. "The question is how the positions were managed, valued and traded."

Such a clear divide between chief executive and chairman is rare and has rattled shareholders. With good reason, analysts said.

"It is unusual to see Rohner and Thiam contradicting each other on such an important topic," said Andreas Venditti, an analyst with Vontobel, a Swiss private bank. This, he added, points to "differences" at the top, "and that doesn’t help anyone at this point."

Not unlike Deutsche Bank chief John Cryan, Mr. Thiam is struggling to convince investors of the effectiveness of his restructuring strategy. After initially shying away from making radical cuts in investment banking in October, which disappointed many analysts, he upped the ante in late March of this year.

Now Credit Suisse, based in Zurich, must reduce its bond portfolio in the midst of market turbulence. The risk-weighted assets of the global markets division are to be reduced from $75 billion (€66 billion) to only $60 billion.

The job is difficult enough, and the bank can ill afford communication glitches. That's particularly true since contradictory statements by the bank's two top executives have prompted some investors to worry about a power struggle.

Bank insiders are downplaying the issue, saying that there are no differences between Mr. Thiam and Mr. Rohner. They note that the two men agree that it took too long to reduce the size of the account with the hard-to-sell bond positions.

Instead, the bank has sought put the mishap down to an internal communications breakdown, as Mr. Thiam, as the new chief executive, was not briefed in time about the scope of the positions.

This is also what Mr. Rohner told Bilanz, a German business magazine.

"The question is, did the people from the global markets division give the CEO enough information? The bank isn’t looking at that," said Mr. Rohner. He also hastened to add that Mr. Thiam is "exactly the right man" for the job, and that major shareholders such as the Qatar sovereign wealth fund support the strategy and top management.

Still, even Mr. Rohner knows that if Mr. Thiam fails, it will adversely affect his own position.

The running joke in Swiss financial circles is that Credit Suisse's self-confident New York investment bankers gave their new boss, the former head of the British insurer Prudential, the runaround at first. But a more serious explanation for why the bank held on to the bond positions for so long is that Credit Suisse simply needs the earnings they generate.

Every bank restructuring costs money at first, and as long as the bond markets were quiet, the securities were generating revenue – until the valuations plummeted, bringing the bank close to $1 billion in write-offs within two quarters.

In May, investors will find out how costly the holdings will be for the bank in the first quarter. Mr. Thiam will probably be especially careful when preparing his notes on the subject.

 

Holger Alich is Handelblatt's Switzerland correspondent, covering the financial industry. To contact the author: [email protected]