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When Credit Suisse Group AG announced a $4.7 billion hit from the Archegos Capital Management meltdown, there was a silver lining: The rest of its investment bank did so well in the quarter, the overall pretax loss would only be $1 billion.

The situation exposes the bank’s dilemma. Its investment bank, which takes on more risk, has been its profit engine, making up for its larger, slower-growing wealth-management business. But now it is expected to be scaled back for safety, with Chief Executive Thomas Gottstein saying its structure and strategic relevance would be evaluated.

The prospect of more restructuring costs and lost revenue in the unit has pushed some analysts to downgrade the stock, which is already down 25% since late February from the one-two blow of the collapse of another client, Greensill Capital, and then Archegos.

Eoin Mullany, an analyst at Berenberg Bank, said risk taking in the investment bank and across Credit Suisse is likely to be curtailed and that “inevitably leads to lower growth and lower revenues."

Even before the recent mishaps, Credit Suisse was among a number of European banks whose long-simmering troubles made them tricky to invest in.

Former Chief Executive Tidjane Thiam cut risks and costs, and set a new cultural tone before being ousted in fallout from a spying scandal last year. But the bank continued to generate high charges from lawsuits and regulatory settlements over problematic business. Many investors have been wary of its riskier business mix than at larger rival UBS Group AG.

“There is little visibility on what needs to be fixed and at what cost. The group may get by on its current capital base, but it has little room" for more unexpected losses, said Filippo Alloatti, senior credit analyst at Federated Hermes.

He said he expects an in-depth business review by António Horta-Osório, who starts as Credit Suisse chairman May 1. Mr. Horta-Osório oversaw an overhaul of Lloyds Banking Group PLC as chief executive.

Last year, a boom year in markets, Credit Suisse made 40% of revenue from investment banking. That was up from 35% in 2019, and close to half before Mr. Thiam’s restructuring starting in 2015. UBS, in contrast, got 28% of 2020 revenue from its investment bank.

At Credit Suisse, much of the 2020 growth came from fees to bring stock and bond deals, including underwriting blank-check companies, known as SPACs.

In March, before the woes from Archegos, Credit Suisse said investment-banking revenue was up 50% from 2020 levels so far this year. It said pretax profit across the bank was its highest in a decade.

Wealth-management revenue, meanwhile, has been weaker, falling 8% in 2020; at UBS it rose 4%. More trading by rich customers in volatile markets didn’t offset lower recurring fees and a squeeze on net interest income from negative interest rates, Credit Suisse has said. Its revenue figure also reflected the impairment of a hedge-fund stake.

UBS more generally has a higher proportion of “shock-absorbing earnings," according to Michael Rohr, an analyst at Moody’s Investors Service. For example, UBS’s wealth-management business is more diversified globally, including in the U.S., which Credit Suisse exited, according to a Moody’s analysis of the two banks in December.

UBS’s investment bank is smaller and less complex, weighted mainly to equities trading, and is easier to manage and monitor for risks than at Credit Suisse, Mr. Rohr said. At the end of March, the ratings agency moved to a negative outlook on Credit Suisse to reflect the unexpected events at Greensill and Archegos and the potential strain on capital.

The different business profiles are reflected in the divergence in how investors value the banks. UBS stock trades for around one time its per-share book value, or what the bank is worth on its balance sheet. Credit Suisse trades for around 0.55 its book value, the widest gap between the two since 2016.

On the same measure, Credit Suisse has slipped against other European lenders with big investment-banking operations. It is for the first time in five years valued at less than Barclays PLC, which trades for 0.6 times its book value. It remains above Deutsche Bank AG, at 0.4 times.

This story has been published from a wire agency feed without modifications to the text.


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