Credit Suisse has been unintentionally conducting an experiment with its clients for several years: How do clients react when their provider produces one debacle after another? The aim of this article is not to talk down the ailing Credit Suisse. Rather, the aim is to understand the perspective of its clients.
“Chiasso-Scandal” Vs. Current Events
In 1977, the Chiasso scandal shook the then Schweizerische Kreditanstalt and the entire Swiss banking system. The resulting loss of CHF 1.4 billion seemed gigantic. As a consequence the CEO resigned and the bank was reorganized. The 1.4 billion francs of 1977 correspond to a current monetary value of almost exactly double that, i.e. 2.8 billion. Of course, CS is a much larger bank today than SKA was in 1977. Nevertheless, it is instructive to put the debacles of recent months into context.
- March 2021: Expected loss with loans to Archego’s hedge fund CHF 4.4 billion.
- March 2021: CS has not yet quantified the losses relating to the Greensill funds. Estimates put the figure at up to CHF 3 billion. According to its CEO, CS will try to pass on as much of the losses as possible to others, especially its clients, to whom it apparently sold Greensill funds as a low-risk investment.
- November 2020 York Capital: Credit Suisse writes off USD 450 million on its stake in hedge fund provider York Capital Management. Credit Suisse had sold the York Capital Management funds to its clients.
- June 2020 Wirecard: Wirecard had faked credit balances of 1.9 billion. Fortunately, Credit Suisse was not involved in this bankruptcy with loans, but had previously sold its clients Wirecard convertible bonds totalling CHF 900 million.
- April 2020 Luckin Coffee: CS was the syndicate bank for the IPO of the Chinese company, which had falsified its sales and thus defrauded investors. Underwriting banks sell the shares to their clients in IPOs. CS was also involved with loans.
- February 2020: Resignation of CEO Tidjane Thiam after the discovery of spying on his own employees. Neither CS nor its clients suffered any direct financial damage. However, the credibility of the management suffered enormously as a result of this case, particularly because exposed individuals such as the CEO and the Chairman of the Board of Directors claimed to have known nothing.
CS had also regularly made negative headlines in previous years: in Mozambique, CS loans totalling around one billion dollars were largely siphoned off to dubious companies. CS employees were convicted of fraud and money laundering as a result. In the tax dispute with the USA, it was Credit Suisse that paid by far the largest fine (US$ 2.6 billion). The list goes on and on.
Consequences for Clients and Shareholders
In order to absorb the losses, Credit Suisse had to raise several billion in fresh capital. Shareholders were not happy about this, as they either had to inject more money or watch their stake in the company being diluted. The development of the CS share price speaks volumes. After peaking at between 85 and 90 francs in 1998, 2000 and 2007, the share is currently trading at around 10 francs. Despite this enormous destruction in value, CS managers were among the best paid in Switzerland during this period. The shareholders let it happen.
CS clients suffered considerable losses in many of the cases mentioned above. The extent of these losses in connection with the Greensill funds remains to be seen. The conflict of interest is obvious: The investment bank procures investment opportunities that are sold to institutional and private clients. In some cases, wealth management is also involved and packages the investments into its own products. Clients are told that the best products are selected for them in a neutral manner. At the investor conference, the managers boast that they have further increased the penetration of client portfolios with their own products and thus profitability
The Bank from the Customer’s Perspective
Customers want a bank that communicates honestly, acts prudently and fairly and puts the customer’s well-being first. What they have received is something else:
- Credit Suisse has repeatedly proven that it cannot adequately assess risks.
- The bank was found guilty in court and employees were imprisoned for their behavior.
- The management spied on each other.
- Around 1,400 so-called “material risk takers” receive a total of well over one billion francs per year. Risk takers? They are employees, they do not take any entrepreneurial risk.
- Communication with clients and investors is not consistent. Clients cannot trust the statements of their advisors.
- The bank has repeatedly been made aware by the supervisory authority that it has a shortage of equity capital. The bank’s equity capital is relevant for the security of customer deposits.
Chairman Urs Rohner and CEO Thomas Gottstein
Global Client Behavior
At the end of 2020, Credit Suisse managed client assets of CHF 1.512 trillion worldwide. Client behavior can be seen to some extent in the published figures. Credit Suisse AG’s annual reports show net new assets in each of the last ten years. In total, Credit Suisse received a good CHF 400 billion more than it lost between 2011 and 2020.
It is not clear how much of this money the bank gained organically and how much found its way to CS through acquisitions. However, the analysis of net new assets does not indicate that any of the events mentioned would have led to a massive withdrawal of client assets.
Swiss Private Clients
CS reports the net new money inflows for private clients in the Swiss unit (Swiss Universal Bank, SUB) separately. The annual reports for the last 10 years show that there was positive net new money inflows also for private clients of the bank’s Swiss unit. The bank only lost more customer money than it gained in 2020. This is explained with an outflow of money from a single super-rich person.
Credit Suisse does not publish exact customer figures, so it is not possible to judge how many customers actually left. But here too, there are no publicly visible signs that many clients “voted with their feet” and withdrew their money.
Reasons for Customer Inertia
As an observer, you ask yourself: How many mistakes can a bank afford to make? What does it take for customers to look for a new provider? Of course, we don’t have any concrete data on what actually motivates CS customers to remain loyal to their bank.
The following are the usual reasons why customers stay with their provider:
- Customers often identify more strongly with their advisor than with the bank. However, banks have done a lot in recent years to prevent this from happening. This is because there is a risk that customers will follow their advisors when they look for a new employer.
- Customers estimate the cost of changing banks to be very high and, above all, they have no desire to deal with it. In the securities business, very different fees are charged for transferring securities to another bank. However, CS curiously is very accommodating to its customers in this respect and only charges private individuals the external costs incurred when balancing their securities account. However, changes to standing orders, debit authorisations and everything to do with payment transactions are difficult.
- There is a widespread belief that all banks are the same anyway and that there is nothing to be gained by switching. This conviction reflects the great frustration of bank customers who have become accustomed to receiving poor service. Closely linked to this problem is the lack of transparency, particularly in private banking. It is not clear to customers where they can expect better treatment.
- Some customers separate their own world of experience from the “news world”. Although they read the negative reports about their bank, they do not derive any need for action for themselves, as they do not have the hedge funds in question in their custody accounts, for example.
Conclusion and Prediction
FinGuide supports wealthy private clients in their search for the best wealth manager. We have therefore gained a lot of experience with clients who have decided to leave their bank. This has shown that most clients have a remarkably high tolerance for frustration. There are usually several reasons that lead to a change. A distinction must be made between actual triggers for action and other reasons for dissatisfaction.
- One clear trigger for action is consistently poor returns. However, customers only recognise this if they analyze this rigorously. Most bank customers find this too time-consuming and do not even realize that their provider is not generating any added value for them.
- Changing advisors also triggers action. Large banks in particular often have higher fluctuation rates in customer advisory services. This leads to frustration among customers who have to tell their story over and over again.
- In fact, many customers also state that they are dissatisfied with scandals and inappropriately high compensation for management. These factors reinforce the decision to switch, but experience shows that they do not trigger it. The same applies to prices that are perceived as too high.
This experience thus confirms the observations made in relation to net new money, namely that various scandals and failures do not encourage customers to switch banks to any great extent. It will be extremely interesting to see whether the current series of incidents will impact net new money in 2021. However, the prediction is that much more will have to happen for clients to leave Credit Suisse on a large scale.
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