Thiam's Four-Letter Word Strikes Fear in Bankers' Hearts

(Bloomberg) -- Credit Suisse CEO Tidjane Thiam has a fondness for management-speak that veers between bland and bizarre.

In a 5,000-word Q&A

While it's easy to take pot shots, Thiam used one word seven times that neatly sums up the only remit Europe's bank CEOs really have these days: cost.

It's this, rather than anodyne talk of the importance of teamwork and clients that decides the fate of management.

Despite his grand claims of hitting upon a "new" model of putting wealth management first and investment banking second (a model rival UBS discovered rather earlier), Thiam made clear there is only one way to lift Credit Suisse's share price in today's bleak revenue environment.

"The only answer is to cut costs." Asked when there would be an end to the cutting, Thiam had difficulty in imagining a future without it: "When we don't have to cut them anymore." That will put a smile on his bankers' faces.

At one level, this is a rational response to an obviously lackluster environment. Negative interest rates, slowing growth and geopolitical risk all spell contraction, not expansion. Wealthy clients are increasingly opting for cheaper passive investment funds.

Annual revenue is expected to fall 14 percent in 2016 and adjusted earnings per share by 18 percent, according to analyst estimates compiled by Bloomberg. While Thiam has managed to bring down operating expenses at the bank -- in the second quarter they were at their lowest in at least two years -- they remain stubbornly high as a percentage of revenue at almost 97 percent.

But it's also a reminder the cost lever is the only one bank CEOs can actually control.

Capital requirements and by extension profitability are in the grip of regulators -- hence why top bank executives are kicking up a stink over new rules from global regulators, using words like "draconian" and "game changer". Economic growth and market confidence decide both the revenue outlook and the cost of shrinking balance sheets -- precisely what is hurting so many banks right now.

"Being in control of our own destiny,'' Thiam says. "That's ultimately what management is about." That statement that sounds more wish than reality.

This isn't just a Credit Suisse problem. A Bloomberg Intelligence analysis earlier this year found operating expenses for Europe's 12 largest banks had fallen only 15 percent since end-2007. And revenue had fallen by more than 25 percent.

Still, the market has singled out Credit Suisse as needing to do more. If you look at Credit Suisse's share stock price -- something Thiam does in the interview to defend his legacy -- it's down almost 50 percent this year. That's a worse performance than even Deutsche Bank.

Credit Suisse shares trade at about half their book value. Return on equity in the second quarter was a measly 1.5 percent, far lower than year-ago levels. That's why Thiam was picked out by one hedge-fund manager in June as a possible "dead man walking" by December.

It's no wonder Thiam admires Federer. But as a European bank CEO, it's hard to play with a broken racket and a whole lot of net into which to sink the ball. At least Thiam looks like a good winner. As he put it: "Winning is nice, if it's done the right way without breaking the rules."

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.