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CSFB loss hits Credit Suisse
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March 16, 1999: 9:48 a.m. ET
Investment banking proves financial black hole for Swiss giants
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LONDON (CNNfn) - Results from two of Europe's biggest banks this week highlighted the dangers of putting too much faith in the profit-generating potential of blue-chip investment banks.
Swiss banking giant CS Group revealed Tuesday that the only part of its business to go into the red was its Credit Suisse First Boston investment banking unit.
The losses, chiefly caused by last year's financial meltdown in Russia, were widely anticipated and came only days after rival UBS reported similar problems. Its Warburg Dillon Read unit lost over 1 billion Swiss francs ($680 million) due to its exposure to Russia and mismanagement of its derivatives operation.
The inherent volatility of earnings from securities operations will focus minds on two big deals expected later this year: Deutsche Bank's takeover of Bankers Trust and Goldman Sachs' proposed flotation.
The Russian crisis, which knocked some 95 percent off the value of Russian government bonds and wiped 85 percent off equities, left CSFB having to write down $1.3 billion. Problems in Brazil are also said to have played a damaging role.
As a result of the emerging market losses, the investment banking operation reported a net loss of 221million Swiss francs ($154 million) last year, a sharp reversal from profits of 1.573 billion francs in 1997.
Overall, CS Group posted a jump in 1998 profit after extraordinary items to 3.1 billion francs from 397 million francs. Net operating income rose by a more 3 percent to 21.7 billion francs.
Analysts suspect, however, that the Swiss accounting system may have allowed the group to hide some of CSFB's losses. "We believe the Russian losses were quite a bit bigger than those disclosed," said one analyst who did not want to be named.
The scale of the write-downs was large enough to prompt the banking group into a management reshuffle in what analysts said was an attempt to exert greater control over maverick investment bankers and brokers. The move is along the lines of similar action last week at UBS.
Richard E. Thornburgh, chief financial officer of Credit Suisse Group, will take up the post of Vice-Chairman of Credit Suisse First Boston effective April 1. Risk management will feature among his responsibilities.
CSFB's results only serve to underline the heavy risks of investment banking operations. "Very few banking groups have been immune," from problems in their emerging markets units, according to Matthew Czepliewicz, banking analyst at Salomon Smith Barney.
CSFB and Warburg Dillon Read are both products of recent mergers themselves and concerns about the lack of management control is already causing concern about impending deals.
Center stage is Deutsche Bank's (FDKB) take-over of U.S. investment bank Bankers Trust (BT). Analysts said the $10 billion deal looks right in price terms but are worried about the implications for pulling the units together. Deutsche is still experiencing problems integrating its Morgan Grenfell unit, acquired in October 1989.
"Our view is that Deutsche has paid a reasonable price for BT but the question is, can they manage the integration because their track record is not very good?" said one analyst who asked to remain anonymous.
The fall out is also expected to depress the price of the planned flotation of Goldman Sachs. The highly-respected U.S. investment house postponed its flotation last year after the Russian crisis spread to other emerging markets.
The perception that no bank is immune from risk is expected to cut a third off Goldman's market value. Estimates now suggest the bank will get its listing away at around $20 billion, versus a value of $30 billion put on it last year.
-- from staff writer Mark Odell
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Credit Suisse Group
UBS
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