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February 3, 2013 5:37 pm
Such is the rivalry between Switzerland’s two giant banks, UBS and Credit Suisse, that their results are always compared in minute detail. When the Paradeplatz neighbours reveal this week how they fared last year, the comparisons will be more pointed than ever.
Whereas UBS responded to the lower returns and higher capital requirements faced by banks since the financial crisis by winding down large parts of its risky fixed income trading, Credit Suisse has so far taken the opposite path.
In a rejig of its senior management late last year, Credit Suisse underscored its commitment to such activities by appointing Gael de Boissard, a fixed income banker, to co-head its investment bank and promoting him to the executive board.
Despite Credit Suisse’s defiance, many analysts think that Switzerland’s second-largest bank may yet have to change tack. Christopher Wheeler, an analyst at Mediobanca, says: “The better the progress UBS makes in implementing its new strategy, the more the pressure will increase on Credit Suisse from investors and regulators alike to follow suit.”
There are certainly parallels between the banks’ situations: both have to cope with the “gold-plated” Swiss regulatory regime that makes it harder to earn money in investment banking, both have a strong wealth management business to fall back on and both lag behind US bulge-bracket banks and Barclays and Deutsche Bank in Europe in terms of trading revenues.
There are also big differences. Analysts say that Credit Suisse’s wealth management business is smaller and less profitable, while its investment bank and in particular its fixed income trading is better positioned than UBS’s was. One Credit Suisse insider estimates that UBS over the past four years earned $16bn less in fixed income than Credit Suisse.
Credit Suisse executives also say that unlike UBS and many other rivals, the bank has spent the past two years in a “painful process” of restructuring its businesses so that it can still earn money under the incoming and much more onerous Basel III capital rules.
Brady Dougan, chief executive, announced last October that the bank as a whole would work to cut its balance sheet by SFr130bn ($143bn) to less than SFr900bn by the end of this year – and that having already shrunk it by more than a quarter in the past five years. Costs are also being slashed.
Within its investment bank, Credit Suisse has moved to increase prices in areas such as mortgage securitisation. This has led to some market share losses in the short term, but Mr de Boissard argues it was worth it.
“We are the only bank operating under Basel III rules for both capital and liquidity. We are putting the finishing touches to this implementation process while other firms have only just started to change their business model and clean out legacy assets,” he says
Many analysts argue that scale is the name of the game in a drastically changed market where banks now need a lot more capital to underpin trading activities. In fixed income, Credit Suisse lags behind with revenues less than half of those of the global top three banks in that field – JPMorgan, Citigroup and Deutsche Bank.
But Mr de Boissard counters: “There is a perception that scale is all that matters in fixed income as a whole but we dispute that. We don’t compete in fixed income, we compete in the 81 business lines within it that we care about.”
The bank has also deliberately stayed and improved returns in some more complex areas such as derivatives where other banks are retrenching because the new rules force them to underpin it with more capital, he adds.
There are some analysts who think the strategy, which in essence is a bet by management on a sharp comeback in the global economy, will work. Derek de Vries, at Bank of America Merrill Lynch, says Credit Suisse is one of the best placed European investment banks for such a “reflationary environment”.
Credit Suisse’s hand will also be strengthened if UBS’s overhaul, which involves the risky task of running down a sizeable portfolio of non-core assets, runs into trouble.
But with a reported return on equity that analysts at Citigroup estimate at a paltry 4.6 per cent for 2012, Credit Suisse still has some work to before it silences the doubters.
Teresa Nielsen, an analyst at Vontobel, says: “In the short term ... there is much more upside for Credit Suisse due to the nature and scale of their investment bank, which normally does well in the first and second quarters.
“But as a long term play, I believe UBS is now much more stable. In the long term, I think we will hear more from Credit Suisse on restructuring.”
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