Suisse is on a roll
After suffering more than most when the dotcom bubble burst in 2000, Credit Suisse has pulled itself back into profitability, says Laurie Laird
Just five years after the financial world was shaken by the collapse of the dotcom bubble, Credit Suisse First Boston (CSFB) has hauled itself back to profitability and respectability. Net income jumped by 42 per cent in the third quarter to Sfr1.92bn, or nearly £850m. Analysts had expected an improvement of the order of 20 per cent. CSFB revealed improvement across all of its business lines. On the investment banking side, trading revenues surged by 47 per cent, while underwriting revenues have more than doubled.
The private banking unit also performed well. Net inflows reached Sfr14.3bn, up from Sfr3.8bn a year earlier. That inflow represents a healthy 9.5 per cent of invested assets, notes Jon Peace, investment banking analyst at Fox-Pitt, Kelton. The robust performance follows a disappointing second quarter, when earnings slumped by 37 per cent after CSFB set aside some £489m to cover future litigation.
One of the biggest players in the technology IPO market, CSFB suffered more than most when the bubble burst in 2000. In April 2003, the bank paid $200m (£113m) to settle charges bought by the tenacious New York Attorney General Eliot Spitzer. Spitzer accused CSFB and an array of other investment banks of releasing favourable research reports on listed companies in return for lucrative investment banking contracts. None of the banks admitted guilt in settling with Spitzer.
Also maintaining his innocence is Frank Quattrone, the CSFB investment banker who personified the late-1990s technology boom. Quattrone brought a vast number of dotcoms to the market, including success stories Amazon.com and Netscape Communications, earning jaw-dropping fees for the bank, and for himself.
But Quattrone was ensnared by government investigations into whether CSFB allocated shares in hot IPOs to favoured clients. He was later sentenced to an 18-month prison term for obstructing justice and witness tampering relating to his conduct during the probe. In fact, CSFB has tangled with regulators all over the globe.
Remember the Flaming Ferraris? That group of high-profile traders — which included Jeffery Archer’s son James — left the firm in disgrace after Swedish authorities accused them of manipulating the Stockholm share market. Indian authorities banned CSFB from stock-broking activities, following an investigation into share rigging there. And Japanese authorities suspended some of the bank’s activities several years back, accusing employees of obstructing inquiries into the marketing of derivatives contracts.
By 2001, the battered bank had parted company with former chief executive Alan Wheat, bringing in the feared John Mack — dubbed Mack the Knife for his cost-cutting tactics at former employer Morgan Stanley. Mack slashed thousands of jobs and persuaded star bankers to accept lower pay packages, but his perceived desire to merge the investment banking operations with a healthier rival put him on a collision course with Oswald Grüebel, a co-chief executive at CSFB. Mack was edged out a year ago and successor Brady Dougan, a CSFB veteran, has made it clear that CSFB has a bright future as an independent operator.
However, investors, still traumatised by the difficulties of the past few years, remain cautious about CSFB. Yesterday the shares advanced only a half a Swiss franc in Zurich trading, or approximately 1 per cent, following strong numbers. The bank is still facing litigation on a number of fronts: last month, failed Italian dairy company Parmalat filed an $8.5bn lawsuit, over CSFB’s alleged role in that spectacular collapse. CSFB was one of the lead underwriters for Refco’s IPO, and could also face litigation relating to Refco’s demise, just months after flotation.
The bank is also embroiled in litigation with insurer XL Capital and with the administrators of failed energy company, Enron. Admitting that the uncertainty over future litigation is keeping the share price under pressure, Jon Peace at Fox-Pitt, Kelton believes CSFB can weather this latest squall. “Each of these could be billion-dollar events but it’s affordable for them. They can maintain their capital ratios even if they have to pay out $2m,” he said.
