Return of the shareholder

Credit Suisse is overhauling its 'unsustainable' business model to rebalance interests and focus more attention on rewarding stockholders

PUBLISHED : Thursday, 21 March, 2013, 12:00am
UPDATED : Thursday, 21 March, 2013, 5:20am

Credit Suisse Group chief executive Brady Dougan said pay for bankers was still outpacing shareholder returns, a dynamic that would change once the bank completed an overhaul of its business model.

"In the past few years, certainly, the shareholders have taken a bigger reduction in their returns than labour has within the business model," Dougan said. "That's not sustainable. That's not right."

Credit Suisse, which has dropped 72 per cent since Dougan took over in May 2007, has sought ways to realign shareholders and bankers' interests.

In 2008, the company paid a portion of senior employees' bonuses in bonds linked to a pool of toxic assets, helping the firm to dispose of risky holdings and free up capital.

The bonds returned 75 per cent between the end of 2008 and November 2011, people with knowledge of the results said. The firm revived the practice for 2011 pay.

The lender, Switzerland's second biggest, has reaffirmed a commitment to investment banking after larger rival UBS said it would cut 10,000 jobs and shrink debt trading.

Credit Suisse has combined its wealth-management, corporate and institutional clients and asset-management units in one division to pare expenses and improve co-operation within the company.

"That's one of the things that the whole transformation of our business model is getting at," Dougan said.

"We want to get back to a point where we can pay people competitively but also reward our shareholders proportionally to that, so it's actually a reasonable split of the economic benefits that the firm produces."

Global regulators are forcing banks to hold more capital in an effort to prevent future government bailouts. Rules outlined by the Basel Committee on Banking Supervision will change the amounts of capital banks must hold against different assets, weighted by risk. That is forcing firms to re-evaluate how they can generate acceptable returns on equity, which are measures of profitability.

Credit Suisse's restructuring was about 80 per cent complete and would allow the lender to generate ROE that's among the highest in the industry, Dougan said.

Return on common equity was 4.28 per cent last year, compared with minus 5.06 per cent for UBS, according to data. Goldman Sachs and JP Morgan Chase both posted returns on common equity of about 10.7 per cent, the data shows.

"The world of the future is about returns," Dougan said. "It's not about just absolute revenues across all the businesses. It's about return on capital."

Dougan said he expected ROE to reach 15 per cent over time. Investors may not be convinced yet.

Credit Suisse shares have dropped 3.5 per cent in the past 12 months in Zurich trading and 10 per cent on June 14, when the Swiss National Bank said the company needed to accelerate efforts to raise capital.

That has led to calls for Dougan's job. Chairman Urs Rohner, who with Dougan has a combined 30 years of experience at Credit Suisse, has so far resisted that notion, saying he stands by his chief executive.

"There's absolutely no indication whatsoever why there should be discussion about the current composition of management, in particular about the CEO," Rohner said.

"We are on a very good track in terms of executing on the strategy that we have jointly agreed and decided upon. And from that perspective, I see absolutely no reason why we should change anything."

Credit Suisse said last month it would seek an additional 400 million Swiss francs (HK$3.28 billion) in cost savings by the end of 2015, on top of four billion francs in planned reductions announced since 2011.

In addition to new capital rules, lenders struggling to polish reputations already tarnished by the financial crisis have been beset by scandals, including efforts to rig the London interbank offered rate, or Libor, the benchmark for about US$300 trillion of securities worldwide.

Barclays, UBS and Royal Bank of Scotland have paid a combined US$2.5 billion in fines since June, stemming from a rate-rigging investigation involving about 20 lenders. HSBC, Europe's largest bank by market value, paid a record US$1.92 billion to settle US money-laundering probes.

The Libor scandal "really calls into question the integrity of the products that the industry offers", Dougan said. "We can't have that. That's a very fundamental thing."

The scandals, coupled with a wayward derivatives bet that caused US$6.2 billion in losses for New York-based JP Morgan, have spurred renewed calls to break up the largest lenders.

Federal Reserve Bank of Dallas president Richard Fisher said the government should break up the biggest US banks rather than allow them to hold an edge over smaller firms.

The industry must work harder to make its voice heard, Dougan said.