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More reasons for Credit Suisse’s investment bankers to fear Tidjane Thiam

Tidjane Thiam

You're ok if you're in the private bank in Asia

Tidjane Thiam has presented his first set of quarterly results as CEO of Credit Suisse. If you’re an investment banking employee at the Swiss bank, you have good reason to feel more afraid.

Sounding world weary but quietly confident in his focus on “shareholder valuation”, Thiam said his aim at Credit Suisse will be the development of a “capital light business model which produces less volatile results”. The emphasis is going to be businesses which generate returns that are, “comfortably above the cost of capital”, said Thiam, adding that business lines in the investment bank will certainly be closed. Which ones? We don’t know yet – Thiam said he’s still in the process of “analyzing and evaluating” the business, but he promised to be “ruthlessly selective” when he acts.

It all sounds a bit ominous for Credit Suisse’s nearly 20,000 investment banking employees, who suffered a 13% reduction in profits year-on-year in the second quarter and saw their cost income ratio rise to over 74%, up from 69.3% the previous year. Return on regulatory capital in the investment bank fell to 15.6% from 18.7% one year earlier. And fixed income sales and trading revenues were down 5% year-on-year in Swiss franc terms.

Credit Suisse’s fixed income performance sounds pretty good compared to the 28% year-on-year reduction at Goldman Sachs or the 21% reduction at J.P. Morgan, but doesn’t exactly make for Thiam’s non-volatile future – especially when you consider that fixed income revenues fell 19% on the previous quarter.

Today’s results follow reports that Credit Suisse’s fixed income traders were forced to stop trading in the past quarter after hitting their capital limits. Perversely, risk weighted assets across the bank actually increased in the second quarter as a result of changes to risk models and the rising value of the Swiss franc. Credit Suisse aims to cut CHF4bn from the investment bank’s risk weighted assets by the end of this year, suggesting capital limits could become tighter still.

As ever, Credit Suisse’s infamous bubble chart helps clarify the situation. Any business in the top segment looks in danger of capital-related cuts. Global credit, securitization and emerging markets could be particularly at risk after a difficult second quarter.

Credit Suisse bubble chart Q215

 

If the investment bank is at risk from Thiam’s rationalization, what’s safe? Think Asia. Think private banking. An entire slide was devoted to the wonders of the Asian business in today’s presentation. Profitablity in Asia rose a massive 101% in the first half of 2015 compared to the same period one year before. In wealth management, the return on regulatory capital was an impressive 29%.

If you’re a new CEO with a focus on shareholder valuation and regulatory returns, it won’t take long to ascertain what you need to keep and what you need to cut. Areas of the investment bank are “impressive” reassured Thiam today – they can provide “good support” to the private bank, he added.


 

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