Stephen A.M. Hester is the chief financial officer at Credit Suisse First Boston, one of the world's premiere investment banks.
In 1997 the firm completed a complex merger that integrated the old First Boston into the Zurich-based banking giant, Credit Suisse Group.
In addition to the internal changes, Credit Suisse First Boston agreed to acquire the European equities and investment banking businesses and portions of the Asian banking business of BZW, the investment banking unit of Barclays PLC. Also last year, the parent Credit Suisse Group acquired Winterthur, Europe's second-largest insurance company.
In an interview at his office in Credit Suisse First Boston's New York headquarters, Mr. Hester discussed the firm's outlook on additional acquisitions, the effects of the Asian economic crisis, the proposed SBC/UBS merger, and trends in worldwide financial services consolidation.
After the BZW acquisitions, is Credit Suisse First Boston's plate full?
HESTER: We're busy, but we're also cognizant that the pace of change in financial services worldwide is not abating, and we're ready to continue with those changes. If acquisition opportunities came along, we would take a look.
In product terms, at the start of the year (1997) we analyzed our fixed- income and financial products divisions as market leaders in scale and profitability. However, in looking at our equity and investment banking divisions-they were in the world's top five, but there is a gap in the market between the top three and the next two. And we felt those divisions were lacking scale, particularly in Europe and Asia, and that's why the BZW acquisitions fit in precisely with our product needs and geographic plans.
Our business I would say is now uniquely balanced geographically, with the U.S. and Europe each contributing about 40%, and the remainder in Asia.
Has the economic turmoil in Asia materially affected Credit Suisse First Boston's earnings?
HESTER: It's too early to tell what the full impact from that region will be. We lost money in our emerging markets division in late October and early November, but overall the firm was profitable. And ever since, we've made money in emerging markets trading. We have substantial credit reserves we can use if need be. But it would be foolish not to be concerned about what's happening there. Really, it all depends on how long the problems there last. If countries default, well, that's a problem for us and everyone else.
Our earnings won't come out until March, but I believe, in some important respects, that our firm has outperformed the entire industry in the past year.
What opportunities do you see resulting from the merger of Swiss Bank Corp. and Union Bank of Switzerland from a U.S. investment banking point of view?
HESTER: Well, there you had two similar companies, both weak in the U.S. and strong in Europe. For sure they will be distracted for a while as they complete that merger, and they may lose some clients and people that might be of interest to us. Basically I see them becoming a stronger European firm, with ultimately a strong financial platform from which to build.
With Credit Suisse's acquisition of Winterthur, has there been any thought at Credit Suisse First Boston about shedding your New York State banking license, which would enable you to make a similar deal in the U.S.?
HESTER: The primary synergy with Wintherthur lies in Switzerland, where Credit Suisse does a big retail business. We have no retail banking business here-and we've no interest in expanding into it-so the rationale isn't the same. As to the topic of debanking, we're "openly agnostic" on the topic. To be sure, the U.S. is the only place that distinguishes between commercial and investment banking. But there are benefits to being a bank here, and really it boils down to deposit-taking.
Last year your firm and several other big banks packaged several billion worth of loans on your books into securities and sold them to investors. What is your motivation for doing this?
HESTER: It's largely driven by regulatory capital requirements. We have a big commercial loan book, but no matter whether we lend to AAA companies or non-investment-grade companies, we need to keep the same amount of capital behind each loan. That really doesn't make sense-an investment- grade loan doesn't need as much capital behind it as non-investment grade. But due to these requirements, we have to tie up a lot of capital to back our loans, and that really drives down your return on capital. I'd say it's 5% in our lending book, whereas firmwide it's 18% to 19%. Securitization allows us to keep capital moving, to have a more liquid balance sheet.
Now that your firm has completed a merger between a big investment bank and a huge commercial bank, any observations for U.S. banks as they enter the investment banking business? Any advice on handling cultural discrepancies?
HESTER: Our cultural discrepancies weren't so bad because both firms were dealing with the same institutional clients. Our only difficulty was that, in some cases, we had loan officers and investment bankers calling on the same company. So we had to sort that out.
My observation is, essentially, make decisions up front and quickly, even if that means breaking lots of eggs. And don't let compromises run for a long time.
It's things that were once thought unthinkable that will become normal once they're done.