Financial services company Credit Suisse (CS, Financial) (Switzerland) was a top detractor for the one-year ending September 30. As expected, the company’s first-half results reflected a challenging revenue environment with both financial market headwinds and company-specific factors negatively impacting top-line results. Despite this, we appreciated that the core wealth management franchise performed well, and the company’s loan loss provisions are tracking well below estimates. Importantly, capital levels were a bit higher than expected. The company’s common equity tier 1 ratio came in at 13.5%, and management expects that it will remain near that level for the second half of the year. Operating expenditures were elevated due to several factors, but management reiterated its belief that it will reach its goal for the medium term, aided by its anticipated savings of CHF 650 million from digitalization initiatives and more than CHF 200 million from procurement initiatives. The company also announced the departure of CEO Thomas Gottstein who will be replaced by Ulrich Körner, former head of asset management. In addition, the company is formally reviewing its investment banking segment and will likely make substantial cuts that should transform it into a capital-light, advisory-led banking business with a reduced absolute cost base in the medium term. We appreciate management’s effort to reduce tail risk by shrinking and simplifying the investment banking segment and allocating more capital toward its higher returning wealth management franchise. In our view, the market is over-penalizing Credit Suisse for past errors. Looking forward, we believe the franchise has attractive assets and a clear, attainable path toward stronger performance that will benefit current shareholders. Moreover, we remain hopeful that various management enhancements, especially in the areas of risk control and compliance, will enable Credit Suisse to live up to its potential and avoid the pitfalls of the past. We hope that the appointment of Axel Lehmann as the new chairman, combined with the timely execution of the company’s new strategic plan, will not only strengthen Credit Suisse, but revitalize it.
From David Herro (Trades, Portfolio)'s Oakmark International Fund third-quarter 2022 commentary.
