Credit Suisse Group AG (CSGN) Chief Executive Officer Brady W. Dougan said pay for bankers is still outpacing shareholder returns, a dynamic that will change once the bank completes an overhaul of its business model.
“In the past few years, certainly, the shareholders have taken a bigger reduction in their returns than labor has within the business model,” Dougan, 53, said in an interview with Bloomberg Television’s Erik Schatzker to be broadcast today. “That’s not sustainable. That’s not right.”
Credit Suisse, which has dropped 72 percent since Dougan took over in May 2007, has sought ways to realign shareholders and bankers’ interests. In 2008, the company paid a portion of senior employees’ bonuses in bonds linked to a pool of toxic assets, helping the firm to dispose of risky holdings and free up capital. The bonds returned 75 percent between the end of 2008 and November 2011, people with knowledge of the results have said. The firm revived the practice for 2011 pay.
The lender, Switzerland’s second-biggest, has reaffirmed a commitment to investment banking after larger rival UBS AG said it would cut 10,000 jobs and shrink debt trading. Credit Suisse has combined its wealth-management, corporate and institutional clients and asset-management units in one division to pare expenses and improve cooperation within the company.
“That’s one of the things that the whole transformation of our business model is getting at,” Dougan said. ‘We want to get back to a point where we can pay people competitively but also reward our shareholders proportionally to that, so it’s actually a reasonable split of the economic benefits that the firm produces.”
Global regulators are forcing banks to hold more capital in an effort to prevent future government bailouts. Rules outlined by the Basel Committee on Banking Supervision will change the amounts of capital banks must hold against different assets, weighted by risk. That’s forcing firms to re-evaluate how they can generate acceptable returns on equity, which are measures of profitability.
Credit Suisse’s restructuring is about 80 percent complete and will allow the lender to generate ROE that’s among the highest in the industry, Dougan said. Return on common equity was 4.28 percent last year, compared with minus 5.06 percent for UBS, according to data compiled by Bloomberg. Goldman Sachs Group Inc. and JPMorgan Chase & Co. both posted returns on common equity of about 10.7 percent, the data show.
“The world of the future is about returns,” said Dougan, a U.S. national. “It’s not about just absolute revenues across all the businesses. It’s about return on capital.”
Dougan said he expects ROE to reach 15 percent over time. Investors may not be convinced yet.
Credit Suisse’s ROE was 10 percent last year excluding 2.27 billion francs in accounting charges related to its own debt, 820 million francs in costs tied to the reorganization, certain litigation provisions and writedowns as well as 853 million francs of gains from the sale of its stake in Aberdeen Asset Management Plc, real estate and other units.
Credit Suisse shares have dropped 3.5 percent in the past 12 months in Zurich trading and 10 percent on June 14, when the Swiss National Bank said the company needed to accelerate efforts to raise capital.
That has led to calls for Dougan’s job. Chairman Urs Rohner, who with Dougan has a combined 30 years of experience at Credit Suisse, has so far resisted that notion, saying he stands by his CEO.
“There’s absolutely no indication whatsoever why there should be discussion about the current composition of management, in particular about the CEO,” Rohner, 53, said in a separate interview with Bloomberg’s Schatzker. “We are on a very good track in terms of executing on the strategy that we have jointly agreed and decided upon. And from that perspective, I see absolutely no reason why we should change anything.”
Credit Suisse said last month it will seek an additional 400 million francs ($422 million) in cost savings by the end of 2015, on top of 4 billion francs in planned reductions announced since 2011.
In addition to new capital rules, lenders struggling to polish reputations already tarnished by the financial crisis have been beset by scandals, including efforts to rig the London interbank offered rate, or Libor, the benchmark for about $300 trillion of securities worldwide.
Barclays Plc, UBS and Royal Bank of Scotland Group Plc have paid a combined $2.5 billion in fines since June, stemming from a rate-rigging investigation involving about 20 lenders. HSBC Holdings Plc, Europe’s largest bank by market value, paid a record $1.92 billion to settle U.S. money-laundering probes.
The Libor scandal “really calls into question the integrity of the products that the industry offers,” Dougan said. “We can’t have that. That’s a very fundamental thing.”
The scandals, coupled with a wayward derivatives bet that caused more than $6.2 billion in losses for New York-based JPMorgan, have spurred renewed calls to break up the largest lenders. Federal Reserve Bank of Dallas President Richard Fisher said the government should break up the biggest U.S. banks rather than allow them to hold an edge over smaller firms.
The industry must work harder to make its voice heard, Dougan said.
“One of the most important things that, as an industry, we need to do is to take the whole too-big-to-fail debate off the table -- to make sure the industry can always survive without having government or taxpayer intervention,” Dougan said. “That’s probably top of the list in terms of things that we need to get done as an industry and with our regulators.”
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