CRYAN, THIAM SIGNAL READINESS TO SCALE BACK ON FIRST DAY

Credit Suisse CEO Tidjane Thiam.

John Cryan and Tidjane Thiam, in their first day as chief executive officers of two of Europe’s largest banks, signaled they will remodel their firms as investors press them to eliminate businesses and boost profit.

Thiam, 52, used his first memo to Credit Suisse Group AG employees on Wednesday to tell them the lender needs to be “ruthlessly selective about what we do and, just as importantly, what we don’t do.” Cryan, the co-CEO of Deutsche Bank AG, said his securities and derivatives trading businesses can’t continue to soak up capital.

“We cannot afford that luxury,” Cryan, 54, said in a letter to employees. “Reducing this reliance should not place us at a competitive disadvantage as the market has anyway already moved in that direction.”

The two executives, neither of whom are former traders like their predecessors, are having to grapple with regulations that are making parts of their fixed-income operation less profitable while fines for misconduct have eroded capital. For Cryan, that may mean dismantling the fixed-income trading empire built up by his predecessor Anshu Jain. Thiam, a former insurance executive, may expand Credit Suisse’s wealth management operation while scaling back the securities unit.

‘Poor Prospects’

Deutsche Bank and Credit Suisse shares are the worst performers in their peer group in the past year, according to data compiled by Bloomberg Intelligence. By contrast, Thiam’s Swiss rival UBS Group AG, which decided in 2012 to scale back its fixed income unit, has surged 23 percent.

Cryan pledged to exit businesses “with poor prospects or business lines that are not controlled to the standards we demand.”

“We are too diversified and too complex for our own good,” he said. “We do not have to be all things to all people.”

Under Jain, a former head of the securities division, Deutsche Bank became one of Europe’s largest investment banks and a leader in debt trading. In April, Deutsche Bank set out a plan to cut 3.5 billion euros ($3.9 billion) in costs and shrink parts of the unit. Cryan said Wednesday he would delay publishing further details about the strategic plan by three months to the end of October.

“I see it as highly likely that we will be seeing balance-sheet reduction in the fixed income, currencies and commodities business,” said Stefan Bongardt, an analyst at Independent Research GmbH in Frankfurt.

‘Slow, Cumbersome’

Sales and trading, which includes earnings from dealing debt and currencies, accounted for 3.65 billion euros of the investment bank’s 4.65 billion euros of revenue in the first quarter. Total revenue at the bank was 10.4 billion euros in the period.

Deutsche Bank’s costs have been driven up by a lack of automation, “inadequate technology” and “ineffective processes,” according to Cryan. The lender has also become “inward-looking and bureaucratic” as a result of fines, he said, calling the decision making “slow and cumbersome.”

“Cryan seems to be taking a more hands-on approach to Deutsche’s various businesses,” said Guy de Blonay, who manages financial stocks at Jupiter Asset Management Ltd. in London. “He makes it clear they must narrow the scope of their activities, with some departments closing altogether. It suggests he will go further than previous management teams.”

Capital Gap

At Credit Suisse, investors are also looking for a fresh strategy under Thiam, former CEO of insurer Prudential Plc.

Thiam “is likely to drive value through hard-nosed restructuring,” analysts at Morgan Stanley led by Huw Van Steenis wrote in a note on Wednesday. “Simply put, Credit Suisse has well over half of its capital allocated to its lowest returning unit: its investment bank.”

The new CEO may also have to address a capital shortfall, which analysts at Barclays Plc estimate at about 13 billion Swiss francs ($14 billion), calculating the gap between the stock price and what its parts are worth.

Thiam said the bank must be “strongly capitalized,” adding that he’ll present a strategy update later this year.

“Stagnation is not an option for us,” he said. “Ultimately, we must grow, with focus and discipline of course but I repeat: profitable, sustainable growth is an imperative.”

‘Trustworthy, Reliable’
Born in Ivory Coast, Thiam takes over from Brady Dougan a year after the bank paid a U.S. fine of $2.6 billion for helping Americans evade taxes. He told employees he would be seeking advice from them on how the bank can be faster and more agile while operating to the highest ethical standards.

“An organization must be trustworthy and reliable,” he said. “I know that expectations are high and that the road forward will not always be straight nor easy.”

His comments echo Cryan’s remarks after Deutsche Bank was fined $2.5 billion in April by regulators in the U.S. and the U.K. for manipulating interest-rate benchmarks.

“Our reputation has been damaged by instances of serious misconduct,” Cryan said in the letter. “Consequent heavy fines have strained our capital resources and will likely continue to do so for some time to come.”

Cryan will become sole CEO when his counterpart, Juergen Fitschen, steps down in May. Before taking on his current role, he was a supervisory board member at Deutsche Bank and previously helped steer UBS through the aftermath of the financial crisis as chief financial officer.

“I’m not going to tell you that it will be sweetness and light in the coming months,” he wrote. “But I am optimistic.”

Bloomberg