By Jed Horowitz
NEW YORK (Reuters) - Credit Suisse Group AG (CSGN.VX) is betting it can turn around its unprofitable U.S. private wealth business with new loan products and a focus on the ultra-rich, a strategy greeted with skepticism by some securities analysts and former officials at the bank.
Bank executives say Credit Suisse Securities (USA) can make money by focusing on ultra-wealthy clients who use multiple investment banking and personal investment services, and by introducing products that generate relatively high and sustainable interest income even when rates are low.
Profit margins can rise by cutting compensation costs through layoffs, training brokers internally rather than through expensive recruiting, and better use of technology to lower back-office costs and improve sales, they say.
The U.S. wealth business is a small part of revenue at Switzerland's second-largest bank, but getting it into the black is becoming increasingly important to Credit Suisse. Wealthy investors worldwide have been closing their Swiss accounts as U.S. and European regulators investigate the complicity of financial firms in helping customers evade taxes, hurting the profitability of the private wealth business in Switzerland.
Profit margin on Credit Suisse's $1.44 trillion (1.3 trillion Swiss francs) of private banking assets worldwide is 1.1 to 1.15 percent, bank officials said. The take would be closer to 1.5 percent if not for the U.S. unit that oversees about $110 billion (99 billion Swiss francs) of those assets, said people familiar with the U.S. brokerage's returns.
Credit Suisse has given the U.S. private wealth business 18 months to turn around, at least temporarily sparing it from the death sentences it is handing down to small and unprofitable operations in 50 other markets, including in Africa, Central Asia and Europe.
The business has not been profitable since Credit Suisse bought it as part of its purchase of U.S. investment bank Donaldson, Lufkin & Jenrette in 2000, according to a former Credit Suisse chief financial officer, who said it was ignored for many years but considered essential.
As one of the largest wealth managers in the world, Credit Suisse needs "to have a presence in the world's biggest wealth market," the former CFO said.
NOT BIG ENOUGH
Last March, the bank named Philip Vasan, a 53-year-old executive whom it credited with reversing the fortunes of the bank's prime brokerage, to head private wealth in the Americas. Bank executives said that despite his lack of experience in retail brokerage, Vasan knows how to work with the very wealthy and how to run businesses efficiently.
Vasan, who declined to be interviewed for this story, faces formidable challenges and lingering skepticism from analysts and within the industry.
Chris Wheeler, a London-based bank stock analyst at Mediobanca, has a buy rating on Credit Suisse but thinks the U.S. brokerage should be shuttered.
"There is no way the U.S. business is sustainable," he said. "They're not big enough there. That's the bottom line."
The brokerage force at Credit Suisse Securities (USA) has declined to about 350 from close to 450 three years ago. That is much smaller than competitors such as Morgan Stanley (MS), which had more than 16,000 brokers as of September 30, or the 7,000 at UBS Wealth Management Americas (UBSN.VX).
Several top brokerage teams have left since Vasan arrived. Many U.S. brokers said they worry that Vasan has no background in the retail brokerage business and fear they will be pushed to dump all but their wealthiest clients.
Further, former executives said, the U.S. business would have been profitable if it had not been weighed down by global corporate expenses for operations, information technology, risk management and other costs allocated from Zurich.
They also say that the cross-marketing strategy being pursued by Vasan has been tried before with little success. Investment bankers, for example, resist entrusting the personal wealth of some of their best clients to brokers. In the past, the parent bank has also offered financing on expensive terms, making loans in the U.S. uncompetitive.
Credit Suisse spokesman Calvin Mitchell said the business under Vasan has been making progress.
"We have focused on accelerating growth in our U.S. private banking client franchise to capture the opportunity in the U.S. market while adapting the business to improve scale and efficiency," Mitchell wrote in an email.
NOT RICH, BUT ULTRA-RICH
Under Vasan, who spent much of the last decade dealing with hedge-fund tycoons and previously directed Credit Suisse's e-commerce investments, the client focus in the U.S. has turned from the merely wealthy to "ultra-high-net-worth" clients. In the bank's lexicon, that's either a household net worth of at least $25 million, or $50 million or more in Credit Suisse lending and investing accounts, according to bank officials.
The average client household has roughly $20 million in accounts at Credit Suisse Securities (USA), according to a former executive.
Mitchell declined to comment on the U.S. business, but said about 44 percent of private banking clients worldwide fit the firm's ultra-high-net-worth criteria. He also would not comment on whether U.S. brokers have been turning away less wealthy clients as a result of the focus on the ultra-rich.
But Vasan, who has managed Credit Suisse's companywide cost-reduction efforts, is planning to run a tight ship in the U.S.
He is devising plans to cut back-office costs and oversaw layoffs of about 35 brokers and other staff during the summer, Mitchell said. Rather than replacing experienced brokers who left, he is developing a retention plan for the ones he wants to keep and working on the training program, the former chief financial officer said.
As part of his plan to build net interest revenue at the U.S. brokerage, Vasan at the end of 2013 introduced its first mortgage product for the hyper-rich.
Analysts said Credit Suisse Chief Executive Brady Dougan's public support of Vasan suggests that the bank will allow the U.S. unit to take more credit risk than it has in the past, improving the chances that the lending strategy can work.
SUPPORTING THE PARENT
Vasan will never generate a profit without convincing Zurich to lower the costs it allocates to the U.S. wealth management business, the former brokerage executives said.
The unit has been absorbing about $400 million of expenses annually for corporate services, many of which it rarely, if ever, uses, they said. Without these, the U.S. brokerage generated profit of at least $200 million annually since 2010, they said.
For example, Credit Securities (USA) was routinely charged more than $100 million a year for products and back-office services from European headquarters that it actually purchased from Bank of New York's Pershing LLC, said a former executive who sought anonymity because of contractual agreements.
Bank officials said costs for services ranging from corporate jets to legal expenses are assigned across the bank and is standard practice for multinational corporations.
"Allocations come with being part of a big bank, which gives you benefits as well," said another former executive, Michael Campbell, who ran the retail brokerage business at Donaldson, Lufkin & Jenrette and, briefly, at Credit Suisse. But if the business stood alone, he said, "it would be wildly profitable."
(Reporting By Jed Horowitz; Editing by Linda Stern, Paritosh Bansal and Nick Zieminski)