Strategy to Cut Risks Pays Off in Crisis
Without exception, the global credit crisis triggered by the bankruptcy of Lehman Brothers has had a far-reaching impact on banks across the globe. However, depending on how banks coped with the situation, their fates have turned out very differently.
While those seeking only to maximize returns, such as Lehman Brothers and Bear Stearns, went belly up, those that were quick to cut risks in balance sheets have risen from the ashes of the financial turmoil.
Credit Suisse is one of the examples emerging as a winner from the financial crisis. It has solidified its position as a leading player in the global financial market by focusing on traditional client businesses while cutting its exposure to risky assets.
In an interview with The Korea Times, Credit Suisse Korea Country Managing Director Lee Chun-kee said that there are three key factors that have helped the global bank withstand shocks from the global crisis ― preemptive risk management, fair value accounting and client-oriented practices.
"The biggest reason Credit Suisse could remain relatively unscarred amid the crisis was our management philosophy that places a top priority on shareholder value, which made us reduce exposure to risky assets in a preemptive manner," Lee said.
Credit Suisse was the leader in commercial mortgage-backed securitization, leverage finances and principal investments, through which investment banks were making the biggest profit. As the market turned weak in 2007, however, these sectors were exposed to the biggest risks.
"Credit Suisse sensed the worsening signs of the market and started discussing the subprime problem from 2006. In the first quarter of 2007, the market situation made the management feel uneasy. Hence, it changed its position related to the subprime mortgage market, and started considering ways of hedging," he said.
When Credit Suisse announced its second quarter 2007 performance and showed concern over the subprime market, it had already taken measures to refurbish its strategic position.
"The decision resulted in a notable performance in the first quarter of 2009. When the market collapsed after the fall of Lehman Brothers on Sept. 15, 2008, Credit Suisse stood on much firmer ground than its competitors," he said. "I think our strategy to cut risk paid off amid the crisis."
In its third-quarter performance, it reaped $2.4 billion in net income, up 50 percent from a year ago, and its capital ratio stood at 16.4 percent as of September 2009, maintaining its notable financial health among global banks. Credit Suisse ranked number two worldwide in terms of cash equities for the first quarter of 2009.
On top of preemptive risk management, the company's principle of sticking to fair value accounting was another important factor for its strong performance.
"We adopted fair value accounting in 2007 and have since stuck to it. The transparent accounting principle has helped us reduce risks by cutting positions in risky assets, such as collateral debt obligations," Lee said.
"Since we revaluated our assets based on market transactions, we were able to remain calm and make the right business decision."
Fair value accounting, also called "mark-to-market" accounting, is a way to measure the assets and liabilities that appear on a company's balance sheet and income statement. Measuring companies' assets and liabilities at fair value may affect their income statement.
During the current crisis, banks and investment banks have had to reduce the value of mortgages and mortgage-backed securities to reflect current prices. Those prices declined severely with the collapse of credit markets as mortgage defaults escalated.
Thanks to its differentiated business strategy, Credit Suisse won the "Best Global Investment Bank for 2009" award from Euromoney in July this year. The magazine said the investment bank succeeded in increasing its market share amid the crisis by focusing on client-focused, capital-efficient strategy.
Regarding its business strategy in Korea, Lee said that Credit Suisse plans to expand its presence here in the long term and contribute to the development of the Korean financial market and economy.
"First of all, we will focus on equity brokerage business. Doing so, we would like to introduce many good Korean companies to global investors to attract more foreign investment," he said.
"At the same time, we will strengthen our business in cross-border M&As to help Korean firms to find foreign M&A targets that can maximize synergy," he added.
Regarding the Korean economy, Lee predicted Korea's numbers will broadly improve over the next three to four months, despite some volatility.
"Leading indicators and confidence surveys are still pointing upwards. We think there is still plenty of leverage from the remainder of the initial phase of the global recovery to see Korean exports rebound substantially by the year-end," he said.
"The positive data may prompt the pending rate hike to happen sooner rather than later, but we think the eventual process of normalization is still likely to be gradual."