In a major revamp of its private banking operations, Credit Suisse (NYSE:CS) is looking to exit or scale down its presence in as many as 50 peripheral markets as the Swiss banking giant flags off the last leg of the large-scale reorganization plan it unveiled last year.  While the move largely focuses on African and central Asian nations where increased regulatory costs have made the bank’s small presence unprofitable, Credit Suisse will also shrink operations in several developed nations where it will only target ultra-rich clients in the future. The move is the latest in a long series of changes the bank has implemented to improve focus and drive up margins for its private banking business over the recent years.
Credit Suisse has diligently worked towards achieving the target of slashing CHF 4 billion ($4.4 billion) in recurring costs by the end of 2015 which it set for itself last year (see Credit Suisse Plans More Cost Cuts After Lukewarm Quarter). The first phase of this plan is aimed at reducing redundancies by merging the bank’s private banking, wealth management and asset management units (see Credit Suisse Announces Simpler Organizational Structure To Focus Business, Cut Costs), and the fact that Credit Suisse is now targeting private banking operations at a finer level would mean that the first phase has been completed successfully.
While Credit Suisse hasn’t detailed the impact of its proposed changes to private banking operations on the size of its wealth management assets, we believe that the reduction in the asset base would be negligible. The resulting decline in revenues will hence be more than made up for by an improvement in margins for the bank’s overall business segment – in line with what we have already priced into our $32 price estimate for Credit Suisse’s stock.
Over the last few years, Credit Suisse has been walking the tight-rope to ensure that its goal of cutting costs across its business units does not end up eating into its top-line numbers in the long run. This is particularly true for its private banking business, which has made no less than three major acquisitions since 2011 while divesting a unit last May. The acquisitions were aimed at improving Credit Suisse’s private banking presence in Japan (see Credit Suisse’s Growth Ambitions Extend to Japan & Vietnam), Brazil (see Credit Suisse’s Global Private Banking Push Supports $27 Stock Value) as well as in Eastern Europe & Middle East (see Credit Suisse Expands Private Wealth Reach In Eastern Europe & Middle East). Quite notably, all the acquired businesses were either in developed nations or in developing nations demonstrating high growth.
The recent decision by the bank to pare down its private banking presence in less profitable regions looks like the next logical step to attain sustainable profits in the long run. This is undoubtedly a large-scale initiative given that it impacts operations in 50 countries around the world. But it also means that Credit Suisse will refocus its entire operations in regions where it can derive maximum value through its workforce. We capture the expected steady improvements in margins for the business as shown in the chart below.Notes: