CS First Boston revival comes with talent and capital dilemmas

By Pamela Barbaglia, Anshuman Daga and Andres Gonzalez

LONDON (Reuters) -Seeking to restore vigour to a business that has been languishing, Credit Suisse says it will reshape its investment bank by resurrecting the First Boston brand.

Yet securing talent and funds amid fierce competition from Wall Street titans and smaller advisory boutiques may complicate the plan.

To lead Credit Suisse First Boston (CSFB), which will be carved out of the Swiss lender, the bank is tapping board member Michael Klein, a shrewd dealmaker who is no stranger to entrepreneurial projects having set up his own advisory boutique in 2010.

Saudi National Bank (SNB), controlled by the government of Saudi Arabia, has pledged to invest up to 1.5 billion Swiss francs ($1.5 billion) in Credit Suisse itself for a stake of up to 9.9%, and said it may back the standalone CSFB which will operate as an independent capital markets and advisory bank headquartered in New York.

Klein, who worked on several deals in Saudi Arabia including the listing of oil giant Aramco, will lead an investment bank which will be "more global and broader than boutiques, but more focused than bulge-bracket players," Credit Suisse said on Thursday, announcing a sweeping group overhaul.

It is unclear if Klein will continue to head his own business, M. Klein & Co, which would compete with CSFB. Klein did not respond to a request for comment.

Credit Suisse's history with the First Boston brand dates back to 1978 when the pair linked up to operate in the London bond market. They later merged to create CS First Boston, but a tough period followed after famed bankers departed and the firm ran into regulatory troubles. Some bankers and investors are expressing scepticism over its ability to regain its past glory in a shrinking market.

The bank saw its shares plummet 18.6% on unveiling the overhaul – their biggest one-day fall since records began in 1989.

"I have zero confidence in Credit Suisse's ability to turn around the bank," said Thomas Hayes, chairman and managing member of Great Hill Capital.

"To change the bank you don't need financial capital engineering, you need a complete change of human capital and culture to even begin to consider a successful turnaround. Otherwise, you'll find the same blow ups and errors one or two years down the road," said Hayes, who does not have a position in Credit Suisse.

SHARP DECLINE

Competition among investment banks has been fierce as global dealmaking dropped 33% in the first nine months of 2022, with just $2.97 trillion of announced deals to the end of September.

Global investment banking revenue is down 41% to $64.4 billion so far this year, Dealogic data shows, hammered by a sharp decline in the U.S. market where revenue from dealmaking and capital markets has almost halved.

Investment banks have also been hit by a drought in stock offerings in 2022 - the worst year in almost two decades for global equity capital markets (ECM), according to Refinitiv data.

And with some of the world's largest economies at risk of recession, the deal pipeline ahead does not look promising, bankers and analysts said.

For investment banks the decline in M&A and share sales - some of the major drivers of investment banking fees - means more pressure on revenue and more scrutiny of investment banking teams, with some banks like Goldman Sachs cutting jobs while others freeze headcount.

Still, Credit Suisse expects CSFB to generate 14% of total group revenue by 2025, starting with annual sales of about $2.5 billion. It remains unclear whether the unit will co-exist with other entities that have been using the First Boston brand in recent years.

WAIT AND SEE

Talent retention will be play a key role in meeting CSFB's targets, but some of its bankers, who spoke to Reuters on condition of anonymity, are in wait-and-see mode as they want clarity on the bank's second strategic revamp in less than a year.

European dealmakers are also concerned that CSFB will shift its focus to U.S. clients as New York will become the centre of gravity for the new investment bank, several sources told Reuters.

Credit Suisse has been plagued by an exodus of senior bankers over the past 18 months. The departure of Jens Welter in September dealt another blow as he quit less than nine months after being named co-head of global banking.

In addition to the exit of some star bankers, some say First Boston faces fundraising challenges as a standalone entity with its own funding requirements and lacking the ability to tap in to Credit Suisse's deep pockets.

"We are unclear about profitability of the First Boston business and how it will be debt funded in the future," JPMorgan analysts said in a note on Thursday.

"We were hoping for a larger investment banking shrinkage - in particular our hope was a closure of the execution business in the investment bank."

Chief Executive Ulrich Körner said, however, that the bank had seen "strong interest from many different investors to come in to CSFB," while Chairman Axel Lehmann hinted at a hard $500 million commitment from "a highly respected investor".

The biggest challenge is that Credit Suisse has historically been one bank and its ability to cross-sell products has been one of its key strengths, a Credit Suisse banker in Asia said, speaking on condition of anonymity.

Yet most trading activities will remain within Credit Suisse, raising questions on CSFB's ability to compete with the likes of Goldman Sachs and JPMorgan.

Credit Suisse is hoping to eventually pursue an initial public offering of CSFB, Körner told analysts. But to pull off a share sale the bank will need to give investors enough comfort on its track record and ability to win business and market share.

"CS First Boston back has a very nostalgic 80s vibe to it, but we're not in the 80s anymore," said Jerome Legras of Axiom Alternative Investments. "Let's see if it works."

($1 = 0.9892 Swiss franc)

(Reporting by Pamela Barbaglia, Anshuman Daga and Andres GonzalezAdditional reporting by John O'Donnell, David French, Megan Davies and Sumeet ChatterjeeEditing by David Holmes and Matthew Lewis)