Is investment banking overrated?

Interview with Andreas Venditti - "I see the alleged disadvantage of the new President of Credit Suisse as an advantage"

cash.ch: Mr. Venditti, major shareholders of Credit Suisse wanted to vote out Andreas Gottschling at the general meeting on Friday, he was a member of the board of directors and head of the bank's risk committee. Now he no longer stands up for re-election. Didn't you just want to meet one of the many people responsible for the debacle surrounding Greensill and Archegos with your planned deselection?

Andreas Venditti: The Board of Directors is responsible for the overall supervision of the risks. And Andreas Gottschling presided over the risk committee of the board of directors. Ultimately, in his role, he was responsible for what happened. It's obvious that certain things didn't work. The request from the major shareholders was therefore not completely absurd, as risk managers had already had to leave the bank.

At the presentation of its quarterly results last week, Credit Suisse spread optimism as if nothing had happened, and the word Archegos was avoided as much as possible. That struck many as bizarre. You too?

I am not surprised that the word Archegos was avoided. The quarterly report also only ever mentions a 'US hedge fund'. This is about a customer relationship, and that means discretion for banks. I was more astonished that Credit Suisse did not want to give any more precise information, which is why its losses were so much higher than those of the competition. Incidentally, this was similar at UBS on Tuesday of this week. One possible explanation is that there could be possible lawsuits in this context and lawyers have therefore advised not to say as much as possible. Much is still not clear. The investigations by the CS Board of Directors are still ongoing.

Looking at the CS share price over the past ten to 15 years, one has to say: The bank's strategy has failed.

Indeed, the CS share price speaks volumes. In comparison, many US banks such as JP Morgan, Goldman Sachs or Morgan Stanley have recently hit record highs in their share prices. These banks are included in the peer group defined by Credit Suisse for comparison purposes. The CS Group has by no means succeeded in generating the cost of capital on a sustainable basis. While the Swiss entity developed well, major losses were incurred in certain international business areas over this period. Nevertheless, CEO Thomas Gottstein said literally last week: 'I'm a fundamental believer in the strategy'. This does not indicate a change of course.

The new Chairman of the Board of Directors António Horta-Osório may see it differently, he was previously CEO of the British retail bank Lloyds. Will he change strategy?

It will definitely be extremely exciting. The good thing about his choice is that he comes from outside the bank. And I see his alleged disadvantage, that he does not come from private banking, asset management or the investment banking business, as an advantage. In a certain sense it is not pre-loaded. However, I see possible conflicts with a view to the composition of the Executive Board at Credit Suisse. The majority have an investment banking background. Extreme strategy scenarios such as a return and concentration of CS on the Swiss business are rather unlikely against this background.

Does that mean Credit Suisse will continue to operate as before with investment banking?

You can't really say that. It was announced that the prime brokerage division, which was responsible for the high loss, will be cut back by around a third. Whether it stays that way is open. According to media reports, certain hedge fund customers seem to want to withdraw their business. The CS shareholders would also be happy if other capital-intensive areas of the investment bank were significantly reduced. The example of UBS shows that this can also be implemented by an investment banker. The investment banker Sergio Ermotti, as CEO of UBS, had also 'scaled back' the bank's investment banking business from 2011.

At CS, Roche CEO Severin Schwan has people on the board of directors for whom the CS debacle is reputational. Against this background, how firmly is CEO Gottstein in the saddle?

The new Chairman of the Board of Directors certainly needs a certain start-up and familiarization period, anyway in the currently difficult phase of CS. I cannot imagine that there will be a change of CEO during this time. When the new Chairman of the Board of Directors has settled in after about six months and has defined a different strategy, he will at best also consider who the people who are suitable for the management of the strategy are.

Over the years, CS earned more from the Swiss business than from the other units. Four years ago, the planned IPO of the Swiss business was called off and instead a second capital increase was carried out after 2015. Has a chance been missed?

The plans for this IPO are certainly still in a drawer on Paradeplatz and could possibly also be implemented relatively quickly. The question is whether you want that at all. I rate the likelihood of a radical strategy à la 'Back to the Swiss Roots' with the liquidation or sale of large parts of the investment bank and asset management as very low.

With the capital increase, CS shareholders can now purchase shares with a value of 8.65 francs each via subscription rights. That seems attractive. The current price of the share is around one franc higher; you yourself have a target price of 9 francs. Should shareholders exercise the subscription right?

Whether the offer is attractive or not depends on the assessment of what one expects from the bank. On the one hand, the operating environment is currently strong. On the other hand, Finma is demanding 'various risk-reducing immediate measures' from CS. Therefore, the CS could benefit less from the environment and lose lucrative business to strong competitors. Finma is also putting pressure on bonuses, which could lead to the departure of top employees.

UBS also published its quarterly figures this week, but stuck to the flowery and WEF-like slogan 'Reimagining the power of investing'. Connecting people for a better world 'largely with strategic statements. Did you not expect more from CEO Ralph Hamers?

UBS CEO Ralph Hamers apparently thinks little of all-day investor events with huge 'slide battles' and big announcements. Rather, he seems to prefer to develop the strategy step by step. This week the first, somewhat 'flowery' announcement took place. Further steps are to follow on the occasion of the next quarterly results, and the financial targets will then also be updated with the annual results for 2021.

Asset management is a constant strategy topic at UBS. There is speculation about a sale or merger of the entity. In 2019 the DWS was in discussion, a few months ago State Street ...

I don't think UBS wants to sell its asset management at all, on the contrary. The topic is more likely to be an acquisition. At DWS, the control issue was apparently a point of contention. Sure, asset management wasn't exactly a problem child for UBS for years, but it didn't go very well. Things have changed since Suni Harford took over, most likely thanks to years of preparatory work. Asset management raised $ 106 billion in new money over the past five quarters. That’s enormous.

Another question would be whether UBS should not buy CS asset management.

UBS would probably already be interested in certain parts of CS asset management. But I doubt whether a deal would be achieved here to the satisfaction of both parties. Thomas Gottstein also said that at this point in time there are no plans to sell. With this statement he has of course left a back door open.

You are analyzing other Swiss financial stocks. Partners Group has a 'Buy' rating. Doesn't the share, which has risen sharply in recent years, mainly benefit from the persistently low interest rate environment and the investment crisis?

The assessment is not wrong, insurance companies and pension funds are certainly driving more and more into the private equity environment because of the prospects for returns. But it's not the only driver of the stock. Partners Group is doing a lot, very right. This also shows the course performance of competitors, which was not as good everywhere. The outlook remains good: Partners Group's global market share is still in the low single digits, so there is further potential. This includes the expansion of business in the USA. Partners Group has built a large center in Denver with hundreds of employees in recent years. In addition, more and more private customers are pushing into the private equity sector.

On the other hand, you have a 'Reduce' rating from Banque Cantonale Vaudoise, or BCV for short. Many investors say: If you already invest in a listed cantonal bank, then because of the market liquidity in BCV.

I understand the market liquidity argument, of course. I have had the 'Reduce' rating since last June. Back then, the share was pretty much at its current level. The reason is simple. The share trades at 2.3 times its book value with a return on equity of 9 to 10 percent.

That means it is overrated.

Yes, especially compared to the other listed cantonal and retail banks in Switzerland, which are valued at 0.9 times the book value on average with a return on equity of around 6 percent. Investors buy BCV mainly because of the secure dividend yield, although in comparison this is no longer significantly higher than with other retail bank stocks.