Thiam's Diet Plan Leaves Credit Suisse Investors Queasy

(Bloomberg Gadfly) -- Tidjane Thiam has said that the only way to lift Credit Suisse Group AG's stock is to keep cutting costs.

And the bank's third quarter results show he did just that: cutting jobs, selling assets and reducing operating expenses.

Yet investors responded by sending the stock down 5 percent. Why? With trading revenue drying up and margins in the wealth management business squeezed, the outlook is getting bleaker.

Thiam knows that European banks can't sit still in the face of tougher capital requirements, negative interest rates and a sluggish economic recovery.

The bank's third-quarter figures reflect that. The bank has this year eliminated 5,400 jobs out of the 6,000 it's pledged to cut by 2016. Quarterly adjusted non-compensation expenses were down 12 percent on the year-earlier period. Risk-weighted assets at Credit Suisse's bad bank fell to $55 billion from $75 billion a year earlier.

It's all part of a broader overhaul designed to make the bank look more like arch-rival UBS, which is better capitalized and more profitable as a result of its post-crisis move away from investment banking in favor of wealth management. But protecting Credit Suisse's business in the meantime is proving difficult.

Its investment bank suffered more than most from a weak third quarter in equities trading. Equities revenue in the third quarter fell to its lowest since at least 2013. The equities division under-performed every major rival in Europe and the U.S., according to Bernstein estimates. Thiam has been cutting the global markets business back, but this performance raises the question of how far those cuts are damaging the franchise.

Like UBS, Credit Suisse's wealth-management unit is also running into headwinds. Private-banking gross margins in Asia and in International Wealth Management fell to their lowest in a year.

These are tough times for the industry -- rich clients aren't trading, interest rates are low and asset prices are stretched. Credit Suisse's Asia private-banking unit is also seeing rising credit risks. Provisions for credit losses surged to their highest in years because of a "small number of share-based loans" in Hong Kong.

Thiam's answer is to stick to the strategy and keep shrinking. That's fair enough. But investors clearly need more to be convinced about the destination. The bank is still only generating a return on tangible equity of 0.4 percent.

After falling 39 percent this year, Credit Suisse shares trade at a 41 percent discount to their book value -- a steeper discount than UBS's 7 percent. Without more reassurance from Thiam about the future, it will get harder to close the gap.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story: Lionel Laurent in London at llaurent2@bloomberg.net.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net.