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Last updated: October 24, 2013 5:56 pm
Ever since UBS took the knife to its investment bank last year, exiting large parts of its fixed income business and laying off thousands of staff, observers have wondered whether Credit Suisse might do something similar.
For the moment, the answer is no. While today’s 40 per cent cut in Credit Suisse’s rates business is significant, the changes at its investment banking arm are less drastic than those unveiled by UBS a year ago.
One reason is that Credit Suisse has quietly already done afair bit of pruning . In 2011, its investment bank held SFr213bn in risk-weighted assets. By the end of September, it held just SFr153bn. Another reason is that its fixed income business is historically much more profitable than UBS’s ever was.
Nonetheless, action was still needed, particularly in the business of trading government bonds and other interest rate products, which until not long ago used to be one of the main profit engines of banks’ trading units but which has become severely challenged recently.
Brady Dougan, chief executive, said the decision had been driven by a greater regulatory focus on leverage ratios which has given lenders an incentive to cut such capital-intensive businesses, and a shift towards central clearing that is severely hurting margins.
These changes have been exacerbated by a sharp drop in revenues this year amid outflows from bond markets and a slowdown in government bond trading. Coalition, the research group, forecasts a 34 per cent rates revenue decline for the world’s largest investment banks this year.
Another factor is Credit Suisse’s relative lack of scale. In what David Mathers, chief financial officer, dubbed an “infamous bubble chart”, Credit Suisse on Thursday outlined how its rates business combines a market position outside the top three with minuscule returns and a relatively high capital usage.
“The bottom line is they are not a top tier player in rates. As a result they can’t use the scale of their activities to absorb the extra regulatory costs, and instead have to be more focused in their approach,” says Christopher Wheeler, an analyst at Mediobanca.
Analysts are split on whether or not today’s move will be enough to adapt to the harsh new market conditions.
“We believe the market was hoping for a more aggressive shrinkage in the investment bank,” Kian Abouhossein, analyst at JPMorgan, wrote in a note to clients. “The mix of 50/50 investment bank capital versus stable business in the long term to us is not going far enough.”
Such questions are being asked not least because fixed income revenues have been in sharp decline in the past few months, with Credit Suisse’s 42 per cent year-on-year third quarter drop comparing unfavourably with the 24 per cent average decline that Espirito Santo estimates for the main US banks.
And news of the pruning of its rates business has not made the comparison with Swiss rival UBS disappear. “Credit Suisse has two and a half times the capital tied up in the investment bank than UBS but so far this year we estimate has only had 7 per cent higher profits. And even after the rates restructuring, CS will have more than twice as much capital,” says Huw van Steenis, analyst at Morgan Stanley.
However, Mr Wheeler says the Swiss bank’s stance suggested they thought they could avoid more radical steps. “What they are suggesting that they could make a 23 per cent return on equity without the non-strategic units. In short, they can maintain a sizeable investment bank and still achieve results which are better than UBS are currently promising,” he said.
Yet even if Credit Suisse can get by without further adjustments, the industry as a whole is unlikely to be able to.
“Will others follow suit? Surely. This isn’t the last we’ve heard of FICC restructuring,” says Kinner Lakhani, an analyst at Citigroup.
“We believe that a lot of the industry will have to go that way. Not embracing those kind of restructuring just puts you further behind because eventually you will have to get there,” Mr Dougan says.
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