After three years of restructuring, Credit Suisse Group AG has a business model fit to withstand a downturn and market volatility, CEO Tidjane Thiam said Dec. 12 during the Swiss bank's investor day in London.

The problem for Credit Suisse before was not the ability to "capture the upside" but was "resilience in the downside" — and a lot of work since 2015 has been done "to get the company ready for tough times," Thiam said.

"It has always been my assumption that this period of expansion which we had since 2009 is not going to last forever, and with every year my pessimism has grown," he told investors. Therefore, the aim was to ensure a low cost base, reduce risk and aggregate capital, which the group has largely managed to achieve, Thiam said.

The bank has repositioned itself as a global wealth management-focused franchise that is less dependent on market gyrations, according to the CEO, who spearheaded the three-year revamp. As the restructuring ends this year, Credit Suisse is "reasonably well positioned to go into tough times," Thiam said.

End of the cycle

The market chatter about late cycle risks has increased after a few volatility spikes battered bank stocks, in particular, this year, while the global equities selloff in October also spooked traders and investors. They are now bracing for the end of a low-volatility lull that has lasted since the U.S. bull market began in 2009.

There is clearly concern about the valuation of banks and the valuation of Credit Suisse itself, which prompted the group to "build a menu" to address those concerns, Thiam said.

In wealth management, the group has reduced the share of transaction- and performance-based revenues to 26% in the first nine months of 2018, from 31% in the same period of 2015. In fixed income, it shifted to a fee-dependent earnings model from a spread-dependent model and has cut back its leveraged finance trading inventory by 59% since 2015. A sharp selloff made November the worst month for the European leveraged loan market since June 2016, LCD News reported Dec. 12.

Credit Suisse has achieved a good balance between its wealth management and investment banking business as well as between the share of mature and developing markets in its portfolio. The focus on entrepreneurs and high-net-worth clients has also paid off. This shows that the strategy is working and Credit Suisse can "now move to bigger challenges" in 2019, Thiam said, referring to global markets.

Despite sales and revenue pools being challenged in the investment bank and capital markets — along with the global markets division of Credit Suisse — these are key for the group's ultrahigh-net-worth clients, Thiam said. "We don't believe that a pure wealth management model allows you to serve those people successfully," he said.

Aiming for better returns

Thiam confirmed the target of 10% to 11% return on tangible equity in 2019, compared to an expected ROTE of some 6% in 2018.

"We have a good chance to get to 10% with actions that are under our control," the CEO said. Lower funding costs and the runoff of legacy assets at year-end, as well as big revenue opportunities between its global markets and wealth management units, will boost ROTE, Thiam said. Credit Suisse aims to register ROTE of 11% to 12% in 2020 and wants to generate above 12% ROTE beyond that.

The lack of restructuring costs and the runoff of legacy assets are each expected to contribute 110 basis points to the ROTE next year assuming revenues are flat, CFO David Mathers said during his presentation. Apart from the cumulative benefit of measures under Credit Suisse's control, there could be an additional marginal benefit from growing revenues, he said.

"We do intend and expect to drive growth in all of our businesses, particularly in wealth management," Mathers said. The momentum in the group's ITS franchise within global markets should also provide a further boost to the ROTE, he said. ITS is a joint venture between Credit Suisse' global markets and wealth management units.

Dividend policy

Both executives confirmed the board decision to return capital to investors via a share buyback of up to CHF1.5 billion in 2019 and another buyback in similar size in 2020. The size of the buyback will depend on financial performance and market conditions, but the bank is committed to repurchasing at least CHF1 billion in both years, the CEO said.

Buybacks will be the group's preferred strategy to return capital to investors but Credit Suisse recognizes the importance of a sustainable ordinary dividend to investors and will aim at growing that by at least 5% per year, according to Thiam "We have chosen to have a low but growing dividend rather than do something spectacular with the dividend," he said.

Credit Suisse plans to distribute 50% of its profit to shareholders and keep a 30% capital buffer for potential regulatory or legacy litigation costs, Thiam said. The remaining 20% will be invested back into the business.

From the beginning of 2019, Credit Suisse will target further productivity improvements in order to reduce its operating cost base by 2% to 3% per year. This "more normalized cost targeting" will release resources for investments in future revenue growth, Mathers said. The group's adjusted operating cost base is expected at CHF16.9 billion in 2018.

"Our ambition for 2019, would be to achieve around CHF500 million of productivity savings", the CFO said This will allow the group to invest up to CHF600 million in digitalization, expansion of wealth management in emerging markets as well as an enhancement of product capabilities in the ITS business, which on its part will allow the global markets unit to better support the wealth management operations.

"The timing of this incremental spend will depend on the financial performance and the market and economic conditions over the coming year," Mathers noted. "Our intention is to retain cost flexibility, helping us to ensure that we meet our pretax income goals in more difficult markets."