Why a Credit Suisse takeover post-Archegos would need a very bold bidder

Five months ago, following the resignation of Sir António Horta-Osório as chair of Credit Suisse, I suggested it might be a good time for a predator to strike. Boy, was I wrong.

Since then the bank’s shares have fallen by more than a third as a series of profit warnings have followed the recent string of risk management disasters. Any potential buyer could now get one of the most famous names in global banking for a much lower price.

David Herro, whose Harris Associates has for years been a supportive shareholder, told Financial News he would now back a takeover at the right price.

His comment followed a report by a Swiss finance blog that giant US custodian and asset manager State Street was preparing a bid for Credit Suisse. State Street subsequently denied the report but Herro said he wouldn’t be surprised if State Street was looking “given the” low valuation of the business ”adding that“ perhaps others may be interested as well ”.

That sounds like an investor desperately hoping to salvage something from one of the worst bets of his otherwise very successful career.

But State Street seems a very unlikely buyer. True, it was reported to be one of the potential bidders for Credit Suisse’s asset management business when the Swiss group’s new chief executive Thomas Gottstein was reviewing the unit’s future. But it is hard to see what interest. State Street’s own shareholders would surely be nervous of it buying a good investment bank at the best of times, and Credit Suisse is a very challenged bank at a very difficult time.

By far the most plausible bidder would be Swiss rival UBS whose new chair, the highly regarded ex-Morgan Stanley veteran Colm Kelleher, might relish a dramatic coup at the start of his reign. Some bankers argue that the pair’s huge wealth management businesses could be combined without too serious a loss of clients and big cost savings could be generated from combining their investment banking businesses in Europe. Previous chair Axel Weber admitted UBS was underweight in investment banking in the US where Credit Suisse is much stronger.

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All this could be had for less than half Credit Suisse’s book value, assuming a 30% takeover premium to the current share price. But it would be a huge risk for Kelleher and newish chief executive Ralph Hamers. Or indeed any bidder.

In wealth management, Credit Suisse is more dependent than UBS on transactions by its clients who, unsurprisingly, have become more cautious in recent months. If the current market funk turns into something worse, things could get very sticky indeed.

In investment banking, Credit Suisse has been hurt by the loss of clients and dialling back of risk following the Greensill and Archegos disasters. Concerns about the chilling effect of these risk management debacles will only be heightened by the news that Credit Suisse has been added to the Financial Conduct Authority’s “watchlist” of firms in need of more supervision.

According to a letter to the bank in May, seen by the Financial TimesCredit Suisse closed most of its prime services division, which lends to and executes transactions for hedge funds, after it was hit by a. But FCA officials said they had not yet seen enough evidence of “effective remediation”. This is hardly what ambitious bankers or their clients want to hear.

Admittedly, this would be more of a competitive problem in buoyant market conditions. As one insider says, the loss of senior staff has slowed sharply as the slump in capital markets activity has prompted other banks to stop poaching.

Investment banking franchises are surprisingly resilient, as Deutsche Bank has demonstrated. And a takeover by a stronger rival might be able to stem the cycle of poor performance leading to cuts and reduced risk-taking, leading to more poor performance, leading to more cuts.

But given the very high level of economic uncertainty, not least the impact of slowing Chinese growth on Credit Suisse’s important Asian business, and the material risk of a nasty market downturn, it would be a very bold bidder that would take on Credit Suisse now. Although the share price is a third lower, this could prove an even worse time to strike than in January.

While questions remain about Gottstein’s leadership, it seems probable that the current management will get a bit more time to demonstrate whether they can turn things around. Perhaps Herro’s clear hopes of a bid will materialise. But the likelihood is that he will have to be very patient to get much of his money back.

To contact the author of this story with feedback or news, email David Wighton