P&M Notebook: Suisse cheese
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P&M Notebook: Suisse cheese

You can’t fault Credit Suisse’s determination, or at least, that of its chief executive, Tidjane Thiam. But each time he sets a tougher target, the world gets tougher still.

Credit Suisse’s restructuring so far seems like a classic example of how hard it is to cut to greatness. The bank has cut billions of risk-weighted assets and thousands of staff from its markets unit — but revenues fell faster still. Perhaps less constrained competitors swooped in; perhaps clients jumped before they were pushed; perhaps it was just a lousy year, at least in the first quarter.

Either way, Wednesday brought the toughest set of Credit Suisse cost-cutting targets yet, and a lowering of the bank’s revenue ambitions. Markets mostly liked the realism — even the analysts at arch-rivals UBS said the stock could re-rate given fair evidence of execution. But it spells another thin year for the bank’s traders and sales teams.

It’s been hard to determine what the bank’s plan for markets actually is. The boss of the division, Brian Chin, walked through a presentation at the bank’s Investor Day on Wednesday, but by the third slide he was citing Credit Suisse’s position in primary leveraged finance and in ECM — products which mostly sit with the far less troubled Investment Banking and Capital Markets business.

As GlobalCapital reported the week before, the division is still hobbled by a huge allocation of capital to operational risk — more than the group devotes to market risk.

UniCredit's big week

This week brings another large scale restructuring — Jean-Pierre Mustier’s big unveiling at UniCredit. The Italian press may not have leaked 100% of the details before the investor day starts up on Tuesday, but some things are widely known.

A huge rights issue, for example. €10bn or more seems likely, perhaps up to €13bn. If the last few years show anything, they show it’s better to take the firepower you need now and not have to return to shareholders.

There’ll be asset sales, too. UniCredit is an agglomeration of many different businesses, some of which Mustier has already sold chunks of. Pioneer has been on the block for ages, but the negotiations with Amundi seem to have gone much better than they did with Santander, and terms were agreed on Monday.

The big question is, what else gets cut or sold? UniCredit isn’t an institution with a ton of expensive legacy uncollateralized structured derivatives, or beaten up real estate or shipping exposures.

Perhaps it isn’t the raciest investment banking operation out there, but it probably hasn’t accumulated much fat either. Mainly, it’s a bank with a market leading position in Italy — an economy which has had too much debt and too little growth for far too long. How do you restructure around the fundamental condition of your biggest market?

Other suggestions include cutting HVB loose — it’s far less profitable than the Italian arm, or most of the high-growth CEE subsidiaries. But it’s not obvious that any other holder will value it more highly than UniCredit. German retail and corporate banking simply isn’t a very profitable industry (too much state-owned competition).

MPS saga

Unfortunately, whatever UniCredit does propose will come out under the shadow of Monte dei Paschi di Siena. Last week was a will-they-won’t-they on getting more time to raise capital; after market hours on Friday they were denied an extension. The Italian state is reportedly ready for a rescue, but the structure of such a bail-out (or bail-in) is still in question.

The big question that’s hung over Monte all year, then, still isn’t answered: how to square European rules to stop bail-outs with the urgent need for another bail-out?

GlobalCapital did dig up some details on the profits to come out of the private sector solution, and they’re quite punchy. The bridge loan to selling the senior NPL tranche was projected to pay 6.5%, or €286m over the year, while simply arranging the securitization would have delivered €69m.

Executing the rights issue was supposed to mean a €170m fee pot, but some of the weekend’s reports suggest that it won’t be an underwritten deal, but a Qatari cornerstone, and best-efforts for the rest.

The lion’s share of the costs, however, are projected to come from servicing the non-performing loan portfolio MPS will sell. Even with government guarantees and Atlante involved, someone still has to collect on the loans, and a typical commission for doing so is 30%. MPS has budgeted a staggering €1bn of servicing commissions, plus €710m for legal costs — the price of enforcement in a jurisdiction where it takes years to foreclose.

Rochford's progress

Which brings us to notable people moves for this week. Lee Rochford, former securitization head and FIG head at RBS, has shown excellent career judgement since leaving the British bank. He became CFO of Virgin Money, steering the challenger bank through its IPO and through a period of real government enthusiasm and regulatory backing for increased UK banking competition.

Now he’s taken over as chief executive of Arrow Global, a debt purchaser which has increasingly partnered with private equity firms to snap up legacy European financial assets. It’s also just bought Italian debt servicer Zenith — one of a handful of firms that could end up with the lucrative NPL servicing contracts. Thirty percent commission on the €360bn of bad loans said to be clogging up the Italian banks is a hell of an addressable market.

At European securitization’s annual jamboree in 2015, Global ABS, Zenith was the firm that hired out the Camp Nou, FC Barcelona’s ground, for a client kickabout — a level of cash-splashing corporate entertainment that suggested something was afoot. But surely the prospects now are brighter than ever.

Other than that, we’d also note the ambitions of Houlihan Lokey in Europe. Last week, the firm announced it was hiring Anthony Forshaw to run capital markets in Europe, and press ahead with the build-out.

Forshaw formerly worked in Deutsche’s leveraged finance operation, which gives a sense of where HL sees opportunities. It is best known as a restructuring specialist — indeed, it’s one of the world’s top firms in that subset of corporate finance, and has worked on deals like Lehman, General Motors and Enron.

Its European business started growing out of this business, but of late it has been buying corporate finance boutiques, taking the Italian, German and Spanish operations of Leonardo (Natixis took France). It went public on August 15 this year, which should give the firm some extra firepower, but is still more likely to concentrate on mid-market and debt advisory mandates, competing with the likes of Rothschild, rather than cutting €5bn cheques for new LBOs and going toe-to-toe with the big financing banks.

The new securitization rules proposed by the European Parliament, and the taper-but-no taper from the ECB, the continued Brexit posturing, and a new round of bank fines also merit some discussion, but sadly, we’re out of space here.

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