Francesca McDonagh endures baptism of fire as Reddit army target Credit Suisse

So, Francesca McDonagh had to leave Ireland to find a bank in crisis.

When the then Bank of Ireland chief executive signed up in April to take a top position at Credit Suisse, a big part of the attraction – aside from a bump-up in pay – would have been the opportunity to try to help turn around Europe’s most scandal-prone bank of recent times.

The London-born banker would not have expected when she finally turned up in the Zurich-based group’s offices a few weeks ago that she would soon find herself part of management team fighting febrile social-media speculation about the bank’s capital, liquidity – and future existence.

It would have been clear, of course, to McDonagh long before she did her first-round interview that Credit Suisse has deep cultural problems.

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It’s a whole new experience being as part of an executive team besieged since last weekend by unsubstantiated rumours that Credit Suisse is facing a Lehman Brothers-type moment

She’s been here before. The hands-on approach the London-born banker took to resolving tracker overcharging after joining Bank of Ireland in 2017 was tacitly acknowledged by the Central Bank last week as a turning point, even as it fined the lender a record €100.5 million for its role in the industry-wide fiasco.

And while Irish public trust in bankers remains rock bottom, third-party surveys of Bank of Ireland staff have shown that the bank’s internal culture improved significantly under her charge.

The challenge at Credit Suisse is on an entirely different scale. Last year alone, the 166-year-old bank suffered a 4.8 billion Swiss franc (€4.9 billion) hit from its exposure the collapse of US hedge fund Archegos Capital Management with a murky past; it agreed to pay $475 million (€485 million) in fines to US and UK regulators to settle investigations into loans to Mozambique that were misspent on bribes and banker kickbacks; and it was forced to freeze $10 billion of client funds that were invested in the collapsed UK supply-chain finance firm Greensill.

Last January, the group’s chairman of nine months, Antonio Horta-Osario, stepped down after he broke Covid-19 quarantine rules and used the bank’s private jet to drop him off in the Maldives for a personal holiday.

The following month, Credit Suisse found itself fighting a rearguard action against massive leak of data on thousands of bank accounts going back to the 1940s, exposing how the bank managed accounts for human rights abusers, fraudsters and sanctioned businessmen.

By the time McDonagh actually joined Credit Suisse a last month she had already been promoted from the intended role of CEO of the bank’s Europe, Middle East and Africa (EMEA) region to become chief operating officer.

She also had a new boss, in Ulrich Koerner, following the resignation of Thomas Gottstein, who had been CEO for a little over two years, after the previous incumbent, Tidjane Thiam, resigned in the wake of an executive spying scandal.

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McDonagh’s employer of two decades before joining Bank of Ireland, HSCB, was among the few major banks globally (along with Credit Suisse) that managed to avoid government bailouts during the financial crisis. She also joined Bank of Ireland long after the existential threat that hung over the Irish financial system had evaporated.

It’s a whole new experience being as part of an executive team besieged since last weekend by unsubstantiated rumours that Credit Suisse is facing a Lehman Brothers-type moment – triggering a sell-off of the bank’s bonds and shares as well as a spike in the cost of taking out a form of financial market insurance, called credit default swaps (CDS), against the group defaulting.

A staff memo from Koerner last Friday emphasising the bank’s “strong capital base and liquidity”, while at a “critical moment” as it prepares for restructuring, triggered the opposite of the desired effect when its contents were leaked – and a slew of social media posters on Reddit and Twitter got busy.

A host of analysts have rushed to the defence of Credit Suisse in recent days, with the likes of JP Morgan arguing the group had “healthy” capital and liquidity and Citigroup’s Andrew Coombs assuring clients “this is not 2008″. However, in banking – where the confidence of counterparties, clients and staff is paramount – once the markets decide you have a problem, it can quickly become self-fulfilling.

The real restructuring that’s ahead of Credit Suisse – at a time when financial markets are volatile – will be difficult.

Credit Suisse may be sticking – for now – to the timeline of delivering its new business strategy on October 27th, when it unveils quarterly results.

However, in an effort to calm the markets in the meantime, we have seen leaks in recent days that it is planning to put its Savoy Hotel in Zurich on the market with a price tag of 400 million francs, and that it is looking to bring in an outside investor to inject money into a spin-off of its advisory and investment banking businesses.

Analysts estimate Credit Suisse needs to raise 4-6 billion francs of capital to short up its balance sheet. It’s hardly insurmountable.

On Friday Credit Suisse opened up another front, saying it would buy back 3 billion francs of its own debt, with the aim of boosting confidence in its cash position. It’s a small deal, of course, for a group that has close to 700 billion francs of total liabilities. But buying bonds at a discounted rates would allow it to make small capital gains here, too.

The self-help headlines in recent days have seen the bank’s bond prices rally and CDS rates fall back. It shares have jumped as much as 30 per cent from Monday’s lows.

But the real restructuring that’s ahead of Credit Suisse – at a time when financial markets are volatile – will be difficult.

If McDonagh is part of a team that succeeds, her own stock will only go one way.