December 1, 2023

Investment Banking

Let Your Investment Banking Do The Walking

State Street, Credit Suisse deal ‘highly unlikely’ say analysts after report of bid sends shares higher

State Street has declined to comment on reports that it is set to make a bid for Credit Suisse, but banking analysts have been quick to pull apart the logic of a merger between the two firms.

Swiss finance blog Inside Paradeplatz reported that State Street was set to make an offer for Credit Suisse at a price of CHF9 a share, valuing the Swiss bank at CHF23bn ($23.6bn).

The report cited one anonymous source with knowledge of the matter, and led to a rally in Credit Suisse’s share price of 3%.

Despite hinting that a statement was forthcoming, State Street later said that it declined to comment on the report.

“We are not going to respond to an earlier news report,” a spokesperson said. “As we have previously discussed, we are focused on our pending acquisition of Brown Brothers Harriman’s Investors Services business.”

A Credit Suisse spokesperson also declined to comment.

READ Credit Suisse warns it is facing another loss in the second quarter

State Street is largely a custody bank, while Credit Suisse operates a collection of different divisions within its sprawling investment bank. This was cited as a major obstacle by banking analysts looking at the logic of the deal.

Mike Mayo, a banking analyst at Wells Fargo, said that while a merger may help State Street “monetise trust bank relationships”, bringing together financial institutions was notoriously complex.

“Acquisitions of brokerage firms often involve buying the firm twice — once for the shareholders and once again for the employees, especially in a market where mergers remain hot,” he wrote.

“We aren’t convinced that State Street would run Credit Suisse better than it is currently being run given a lack of expertise in a lot of the areas where Credit Suisse competes — investment banking is not a core competency for State Street,” he added.

In September last year, State Street unveiled plans to acquire rival Brown Brothers Harriman’s investor services unit in a cash deal worth $3.5bn. The division includes custody and fund administration.

In a note, Jefferies analyst Ken Usdin said: “For many reasons, we see this combination as highly unlikely, based on capital levels, State Street’s pending Brown Brothers Harriman deal, and Credit Suisse’s plethora of ongoing legal/business challenges.”

The Swiss bank’s shares slumped earlier in the day after it issued a trading update that warned of a likely fall to a loss in the second quarter amid poor performance within its investment bank. That was the third profit warning this year.

Credit Suisse’s investment banking unit has been hampered by a slump in capital markets activity and monetary tightening by central banks in response to inflation, it said in a statement.

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The latest trading update is another headache for Credit Suisse, which has lurched through successive crises over the past 12 months. It took a $5.5bn hit from the collapse of family office Archegos Capital in March last year, and was also embroiled with disgraced supply chain finance firm, Greensill Capital.

The bank has been linked with potential tie-ups with rivals previously. Last June, Reuters reported that Credit Suisse was considering a merger with Swiss rival UBS as one option to revive the business after its share price tumbled by more than a quarter in the wake of the crises.

Credit Suisse has overhauled its management team over the past 12 months including the departure of chair Sir António Horta-Osório, who left after just nine months in the role after breaking Covid-19 restrictions to attend sporting events. He was brought in to turn the business around and laid out a strategy for growth in November, which the bank is still following.

In April, the bank said that its chief financial officer David Mathers, its head of Asia Pacific, and general counsel will all be replaced. This completed an overhaul of its management board that has seen only chief executive Thomas Gottstein and the head of its domestic banking business remain in place.

In an interview with Bloomberg at the World Economic Forum in May, Gottstein denied that Credit Suisse was an acquisition target. “We have a total focus on our strategy. We are at a valuation now where we have a lot of upside. If we deliver on our strategy then our share price will follow and that’s what we’re focused on,” he said.

Gottstein has said previously that 2022 would be a year of transition, and that performance was unlikely to bounce back this year. However, there is growing pressure for him to prove that the bank is on the right track. Credit Suisse is set to provide further details on cost-cutting initiatives during an investor presentation planned for 28 June.

To contact the authors of this story with feedback or news, email Paul Clarke and David Ricketts