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Credit Suisse CEO doubts feasibility of hard ROTE goals and big sector mergers

CEO Tidjane Thiam never intended to set a hard target for return on tangible equity for Credit Suisse Group AG, he said Dec. 11, speaking about the decision to cut the ROTE outlook for 2019 and 2020.

The Swiss bank now expects ROTE of about 8% in 2019, compared to its previous guidance of 10% at flat revenues; and of roughly 10% in 2020, from previously 11% to 12%, it said in its investor day statement.

The 2019 guidance of 10% was not meant to be set in stone and that is why the original guidance had the flat revenue caveat, Thiam said, adding that he does not like return on equity as a target in general.

"It's an implicit revenue forecast, which is not a business I want to really engage in when you know the uncertainties in the world economy," Thiam said. Such targets are "imperfect" and could push banks to damage their long-term business while trying to reach a certain number in the short term, he said.

Visibility

He also noted the ROTE target change in late 2019 makes sense because now the bank has more visibility into 2020.

Although Credit Suisse has set a tentative medium-term goal of 12%, Thiam said he did not want to commit to hitting that target in 2021 given the high geopolitical uncertainty and the upcoming U.S. election.

"I'll be in a much better position to answer in November 2020," he said.

Credit Suisse looks at its 2020 target in a different way, aiming at an increase of some 175 basis points based on factors "that will be acceptable to people who are extremely skeptical," Thiam said. The main growth drivers will be further loss reduction in the corporate center division, containing the group's residual legacy assets, interest income benefits, and funding savings, all accounting for some 95 basis points of the increase.

The corporate center loss is expected to come in at CHF225 million to CHF250 million on average per quarter in 2020, compared to a CHF270 million quarterly average as of Sept. 30.

The rest of the ROTE is expected to come from productivity and cost savings, "known management actions" and a lower tax rate. Credit Suisse also aims to raise its tangible book value per share to approximately CHF18, from CHF16.2 as of Sept. 30, which will be a drag on ROTE, Thiam said.

Organic growth

In terms of future growth, Thiam said he prefers organic expansion to acquisitions.

He expressed skepticism about large-scale consolidation in European asset management and investment banking, especially across borders. While in certain limited cases in the U.S., on a domestic level "it works," across borders it is difficult with very few opportunities, he said.

"Given the profitability of the marginal business ... and the quantum of organic growth we are getting, an acquisition seems unattractive at this point in time," Thiam noted.