But investors still place a higher value on Credit Suisse. Shares of the German lender fell nearly 6% on Wednesday morning, while the Swiss group’s stock fell less than 1%. It’s a puzzle: investors change their minds too slowly on both.
Since last year, the joke has been that Credit Suisse has taken over from Deutsche Bank as Europe’s most dysfunctional big bank. The Swiss group’s sloppy risk management was exposed by its $5.5 billion loss following the collapse of Archegos, a hedge fund-style family office, whose founder, Bill Hwang, has now been indicted United States. Meanwhile, some Credit Suisse clients have suffered huge losses on funds invested in short-term debt managed by Greensill Capital, the bankrupt UK lender.
Deutsche Bank’s problems were probably worse five or six years ago than Credit Suisse’s today: it had more bad assets and needed an expensive IT rebuild. With a lot of hard work, Deutsche Bank now needs revenue growth to increase profitability. Some investors are skeptical about his arrival.
Even so, Deutsche Bank’s return on equity is expected to outperform Credit Suisse this year and in 2024, according to consensus data from Bloomberg. Credit Suisse should do slightly better in 2023.
In the first quarter, Deutsche Bank performed well as expected: trading in interest rates, currencies and emerging markets benefited from volatility and wider spreads between bid and ask prices than banks can quote in those times. Its growth in fixed income income was only surpassed by Goldman Sachs in percentage terms.
In addition, its investment in banker mergers and acquisitions is paying off, with commissions up nearly 90%, albeit from a small base.
However, the costs have been increased by two things: higher premiums expected for bankers in areas that are doing well and a big jump in the European levy for an insurance fund to cover future bank failures. The levy increased by 28%, but each division also had to pay a larger share because the bad bank of Deutsche Bank decreased and therefore a smaller allocation of the tax is needed.
This cost surprise was another complicated wrinkle in Deutsche Bank’s takeover story. This shouldn’t bother investors, but as a bank struggling to regain confidence, any swing always provokes a reaction.
At Credit Suisse, the story was simpler: it lost revenue in most companies. Some were predictable: In investment banking, it closed its main brokerage, which lends to hedge funds, while its fixed-income trading is focused on U.S. mortgage bonds, where trading was poor for all banks . In wealth management, weak Asian markets, new bouts of Covid and China’s Common Prosperity Policy to rein in billionaires and tech entrepreneurs have all taken their toll, as they have for UBS AG this week.
But Credit Suisse lost more ground than expected in advisory work on takeovers, in leveraged finance for private equity deals and in equity trading. Even taking into account the $173 million in lost revenue from its closed prime brokerage, trading in the shares fell 30% to $545 million, a far worse performance than rivals like Morgan Stanley and UBS, where income increased.
Fees for fundraising transactions and advice have also fallen significantly more than their peers – almost 60% lower. The collapse of the SPAC listing treadmill, which powered both the advisory and equity businesses of Credit Suisse, hurt, but being so dependent on a single high-risk business is not good.
But there is also the question of whether the bank has the right people and the right incentives after several years of aggressive targets, poor risk management and the disasters that followed. Some investors worry that Credit Suisse’s culture will take longer to correct itself than a year or two.
Credit Suisse is also cleaning up a long list of dirty laundry in courts and negotiations, some of which has been around for more than a decade. It pre-announced nearly $700 million in litigation costs, which is expected to put it at a loss for the quarter. Ultimately, this loss turned out to be worse than expected due to weak revenue.
Investors won’t give Deutsche Bank the benefit of the doubt until it consistently delivers revenue growth and controls costs. But they also don’t seem to have faced the amount of work and time that could be needed to turn Credit Suisse around.
Deutsche Bank’s market valuation has fallen to a third of its expected book value. Credit Suisse, although down sharply, is still nearly 40% of expected book value. They should change places.
More from Bloomberg Opinion:
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• Has the chief activist met his match? : Chris Hughes
• UBS knows this business boom won’t last forever: Paul J. Davies
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. He previously worked for the Wall Street Journal and the Financial Times.
More stories like this are available at bloomberg.com/opinion