Proposals by an activist investor to spin off the investment banking arm of Credit Suisse Group AG are not viable, but its private banking and wealth management units could survive as stand-alone entities, according to equity analysts.
RBR Capital Advisors, a minority shareholder backed by the lender's former investment bank co-head Gaël de Boissard, says the aggregate valuation of separate units would double Credit Suisse's current CHF40 billion if the investment banking unit were reduced in size and listed on the stock exchange, with part of it held by staff through a partnership structure, the Financial Times reported Oct. 17. The rest of the bank would be divided into an asset manager and a wealth management group including its current retail operations.
The Swiss hedge fund, which recently acquired a stake of around 0.2% in the group, investing some CHF 100 million in 5 million Credit Suisse shares, will present the break-up plan Oct. 20 at the JP Morgan Robin Hood investor conference in New York, Finanz und Wirtschaft reported Oct. 16.
But, while activist shareholder pushes for split-ups are not unprecedented in the banking world, the chances of Credit Suisse's investment bank surviving as a stand-alone entity are slim, analysts said. Setting up a "pure-play investment bank" would also go against the current trend in the sector, as major players such as JPMorgan Chase & Co. and Morgan Stanley have instead moved toward diversification, said Andreas Venditti, equity analyst at Swiss bank Bank Vontobel.
"This split-up fantasy [pops] up every couple of years. The idea is always the same; people think that the investment bank is diluting other parts of the business and therefore the valuation of the bank, and that's why they believe if you split it up everything should have higher value," he said in an interview.
In 2015, activist investor Knight Vinke (Switzerland) AG urged UBS Group AG to spin off its investment banking unit, which did not happen but led to a "very drastic reduction of the investment bank," Venditti added.
A split could even reduce value at Credit Suisse, which has one year left of its three-year revamp, aimed at reducing the investment banking unit and focusing on more profitable private banking and wealth management, according to Daniel Regli, vice president of equity research at MainFirst.
"I personally think it does not make sense to break up the company. The investment bank is probably valued higher currently than it would be on a stand-alone basis," Regli said.
Other investors have also spoken against the proposal. David Herro, chief investment officer at Harris Associates, which holds a 9% stake in Credit Suisse, told the Financial Times that although he did not think the break-up plan "had a lot of merit," the bank's management ought to investigate moving the investment bank to "a more friendly region" with less strict capital requirements, such as the U.S."
Private bank, wealth management attractive
Yet although a split-up might not favor the investment banking division, it might unlock some value for the other two main units of Credit Suisse, according to Johann Scholtz, a bank analyst at Morningstar.
"The stand-alone private bank and wealth management units will be very attractive businesses with much lower funding costs than a group that includes an investment bank," he said.
Although RBR Capital Advisors does not have a significant stake in Credit Suisse yet, there are a number of disgruntled Credit Suisse shareholders who may be receptive to a break-up proposal, Scholtz noted.
The Swiss bank faced push back from shareholders ahead of its annual general meeting this year, with investors unhappy with the management board's compensation and bonus package given a relatively weak financial performance. The board eventually had to accept a 40% cut in remuneration.
CEO Tidjane Thiam's initial plan for a partial initial public offering of the group's Swiss banking unit was also unpopular, and was replaced with a CHF4-billion capital raise.
A spokesman for RBR Capital Advisors confirmed to S&P Global Market Intelligence that it had bought a stake in Credit Suisse and that RBR CEO Rudolf Bohli would make an announcement at the New York conference Oct. 20, but declined to give more details. A spokesman for Credit Suisse said that while the bank welcomes the views of all of its shareholders, it is focused on its three-year restructuring plan, "which is well on track and which we believe will unlock considerable value for our clients and shareholders."