Credit Suisse Needs a Smarter Play, Not a Gulf Bailout

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The Gulf’s deep-pocketed investors are looking at global investment banks again — more than a decade after they made billions of dollars worth of bets on them during the last financial crisis.  To make their money matter this time, though, they’ll need to work on their strategy.

This past week, news emerged that Abu Dhabi and Saudi Arabia are weighing whether to put money into Credit Suisse Group AG’s investment bank and other businesses to take advantage of depressed values, as the Swiss lender cleans house and seeks to shore up capital, Bloomberg News reported, citing people with knowledge of the matter. Sounds like a 2008-type play, all over again.

There’s more at stake for the big spenders now. At a time when Gulf states are trying to make their capital go further and increase their global influence beyond just oil wealth, how they put their money to work matters. Picking up stakes and trophy assets isn’t enough. If the sovereign wealth funds with their brimming coffers want to join the big leagues, they’ll have to be controlling shareholders and show they can make strategic plays.

During the financial crisis, they came in with big checks and walked away with small, minority stakes. Many of the investments didn’t turn out so well, and didn’t do much to establish their standing as either savvy investors or rescuers of the crippled global financial institutions.

Now, with their new found swagger as the rest of the world works its way through an energy crisis, Saudi Arabia and the Emirates of Dubai and Abu Dhabi are all competing to become regional financial hubs, drawing in talent, big business and foreign companies. Saudi Arabia’s Public Investment Fund, for instance, hasn’t previously shown the same inclination toward financial firms as it has for technology, infrastructure or industrial plays. Whichever state takes a bold stand on the global stage could accelerate its path toward a pole position.

With Michael Klein involved — the former star Citigroup Inc. investment banker who knows his way around Saudi Arabia — Credit Suisse is an opportunity, and owning a 51% stake in its investment banking arm would make that easy. Playing a key funding role at a global institution, although a shadow of its former self (therefore, small enough) but still deeply embedded in the financial system, would bring the influence they want. These businesses need to be able to use their balance sheets to make money — especially now, as interest rates rise. Very few can fund this the way the large Middle Eastern investors can.

Take the profitable securitized products business, which the Swiss firm has assessed should be sold because it requires too much capital and has limited overlap with the mainstay wealth management unit. By 2024, it’s estimated 400 million Swiss francs ($398 million) of pre-tax profit would account for a big chunk of the total of 700 million Swiss francs, according to analysts. That’s a valuable business worth owning. If the likes of Abu Dhabi or Saudi Arabia step in, they can inject more capital, shore up buffers and reduce funding costs, while keeping a money-making global lender intact.

It could be win-win. For the Credit Suisse group, a structure like this removes the financial headache of holding the entire investment bank and its risk, while maintaining access for its wealth and asset management arms. Along with giving these Gulf funds more control, taking a majority stake will help avoid the follies of their peers in Qatar, who stepped in to rescue the Swiss firm  from some of its botched deals. In addition, building out deeper financial channels within the region could help the Gulf’s banking sector evolve. Of course, regulators would need to be persuaded, too.

The ties run deep and have been cultivated over decades. The Qatar Investment Authority and Saudi Arabian conglomerate Olayan Group already have stakes in Credit Suisse, after they helped it raise over $6 billion. These firms pared back their stakes over time but have made other rescues, too. At the onset of the financial crisis, the entire board including former chief executive officer Brady Dougan, showed up in Dubai. That year the Swiss lender  announced it was expanding its presence in the Gulf. Over the past decade, it has tried to bank the rising number of millionaires in the region, deploying capital to its clients through financing activities. These relationships have managed to circumvent regional geopolitics, too.

Stepping in with a bunch of cash may give the impression that you’re establishing a presence. Doing it smartly is likely to come with returns. Credit Suisse investment banking headquarters in Riyadh or Abu Dhabi, perhaps?

More From Bloomberg Opinion:

• Rajeev Misra Must Be Doing Something Right: Ren & Trivedi

• Monday Blues Come to UAE. Will the Saudis Follow?: Bobby Ghosh

• Over New York, London and Hong Kong? Move On: Anjani Trivedi

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. Previously, she was a reporter for the Wall Street Journal.

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